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Why Indian debt is in great demand? - Outside View by PersonalFN

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Why Indian debt is in great demand?
Sep 22, 2014

Recently, yield on India's 10-year sovereign bond touched its 11-month low. Rupee too is showing positive signs and holding up strong. These are unusual phenomena considering weakness of some other major currencies against US dollar. As talks of reversal in loose monetary policy of the U.S. have gathered pace of late, dollar has started gaining ground against some of world's major currencies. You might be puzzled as to why Indian rupee and Indian debt have been exceptions. PersonalFN tells you why...

Monetary policy stance in the U.S.

It was believed that Fed might hike policy rates earlier than expected. Global markets were watchful of the Fed's move. Indeed, it lowered the pace of monetary stimulus but assured that, the borrowing rates would be maintained near zero for considerable time. It is now expected that interest rates would stay lower until job data looks promising and objectives of price stability are achieved. However, now there is a possibility that whenever Fed goes for rate hikes, rates might go up faster than expected. This pushed dollar Index high and gold lower. Treasury yields in the U.S. are hitting highs.

Why India is an exception?

There are two main reasons for it. One is fundamental and the other is technical.

Indian Government is expected to stick to its borrowing target in the second quarter. Moreover, it remains committed to containing fiscal deficit to 4.1% of GDP. This has raised hopes of investors that, there will be lesser problems on the fiscal deficit side. Falling crude oil prices would lower India's import bill and help Government save on oil subsidies. Current Account Deficit has come off sharply to 1.7% in the April-June quarter of the current financial year. Wholesale price inflation for the month of August 2014 came in at 3.74% which is a 5-year low. Industrial growth has softened in July. Consumer price inflation for August 2014 was recorded a tad lower than the full year target of 8% set by RBI. These indicators suggest that it is unlikely that interest rates would move up in the near term. India's forex reserves have also been much higher than what they were a year back.

On the technical side, bonds are witnessing huge buying interest from Foreign Institutional Investors (FIIs) as they are nearing their exhaustion limit set for Sovereign debt investments. They have so far utilised about 98% of their limit. It is unlikely that the limit would be raised further. RBI Governor had made a statement publically that there must be control on FII investments, as country otherwise becomes vulnerable to sudden outflows. Fund managers of global funds are trying to seize the opportunity of having a share in the last bite. It is evident from the FII investment figures for the past 1 month. FIIs have invested nearly Rs 34,000 crore in Indian debt markets.

What to expect?

PersonalFN is of the view that, domestic as well as global cues may guide debt market investors, going forward. Unless retail inflation cools off, RBI may not cut policy rates. Once FII flows slow down, there would be an upside pressure on bond yields. Considering this, PersonalFN suggests that it is risky to take any call on the movement of yields as of now. PersonalFN has always believed that, investors should consider their time horizon while investing in debt instruments.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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