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Global funds bullish on Indian Rupee sovereign bonds

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(Credit: Rajkumar/Mint) NEW DELHI, INDIA: Picture showing hands counting the currency notes of Indian one hundred rupees in New Delhi, India Indian Currency Rupees Notes
March 28
8:07 AM 2016

Some global funds are upbeat on Indian Rupee sovereign bonds. India's high performing debt fund managers forecast further gains from sovereign bonds as benchmark notes heading towards their best March returns in 13 years. The 10-year yield is likely to drop by 25 basis points from 7.51 percent during six months on the 23 March. The rally in bonds is poised to ease that made March worst period for Indian sovereign debt in last decade. 

ICICI Prudential and Kotak Mahindra Asset Management Co forecast that a 10-year yield may drop 25 basis points in six months from 7.51 percent on 23 March. ICICI and Kotak Mahindra delivered the first and second best returns in three months to 22 March. This gain would add to the decline of 12 basis points since 29 February, exceeding the biggest drop in any March since 2003. 

LiveMint reports the average forecast of analysts is a three basis point drop by 30 September 2016 whereas some forecasts are aggressive when compared with others. India's Prime Minister Narendra Modi is keen on reducing budget deficit to a nine-year low. This made foreign investors turned net buyers. Local funds predict that yield may continue to fall as Reserve Bank of India (RBI) is lowering its 6.75 percent benchmark rate by 50 basis points in 2016.  

Lakshmi Iyer, who helps oversee $8.25 billion as head of fixed income at Kotak Mahindra, said "There are more legs to the rally. The government adhering to fiscal discipline, reduction in the administered interest rates on savings and inflation remaining subdued has led to a rally in bonds. What's happening is all these have led to anticipation that these factors will lead the RBI to cut rates further."

The Indian government in February signaled it would keep a deficit target at 3.5 percent of gross domestic product (GDP). The target of 3.5 percent budget deficit is the lowest since March 2008. Consumer price inflation slowed to 5.18 percent in February. India's 10-year yield declined to 7.50 percent on 21 March the lowest since July 2013. 

There are other factors that would impact consumer spending and budget deficit such as Seventh Pay Commission increase by INR 1 lakh crore (1 crore= 10 million) and additional funds availability to nationalized banks. Modi is also taking measures on rural spending to ease stress of drought conditions. The Indian government is spending heavily on infrastructure, as reported by Quantum Mutual Fund.

The debt level of emerging market rose in March on global growth concerns. Federal Reserve has indicated for slow pace of US rate hike by Federal Reserve. Bloomberg Emerging Market Local Sovereign Index gained 3.2 percent in March indicating its best since 2013. 

Indian rupee sovereign bonds are best performers in Asian markets for two years in a row. Some global funds are favoring Indian rupee sovereign bonds. Oil price drop, stable currency and marginal exposure to China are positive factors for India, attracting global investors. India has become an attractive place for fixed-income investments, according to PineBridge. Some global funds are overweight on Indian bonds, further adds Bloomberg.

Kotak Gilt Investment Provident Fund and Trust Plan gave a return of 3.46 percent in three months. The second best yield among mutual funds is from medium and long-term sovereign debt with at least $100 million in assets, according to Value Research India Pvt. ICICI Prudential Gilt Fund is the top performer in the category with 3.48 percent. 

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