Barclays says it is bullish on Indian government bonds and the quota offering presents an opportunity to enter the market cheaply given the ongoing holiday season.
Appetite for developing-nation assets is improving after the Federal Reserve laid out a gradual path of interest-rate increases, with deposits into US emerging-market exchange-traded funds climbing at the fastest pace in two months last week.
Foreign holdings of Indian debt have dropped 98.2 billion rupees over December and November, set for the biggest two-month outflow since 2013. They surged by 146.8 billion rupees in October, as global funds rushed to buy after the first increase in limits under the September plan took effect.
The rupee jumped 1.4 per cent in the eight days through December 28, the longest stretch of gains since June 2011, with Edelweiss Financial Services and RBL Bank predicting the increase in debt limits will spur more gains.
The currency has risen 0.4 per cent in December to 66.3950 a dollar, and its one-month implied volatility, used to price options, slumped to 5.54 per cent on Tuesday, the lowest since August 11.
Investing in rupees will earn 2.5 per cent including interest by March 31, the most in Asia, estimates compiled by Bloomberg show. The yield on India's benchmark 10-year sovereign bonds has fallen three basis points this month to 7.76 per cent and remains the highest in the region after Indonesia.
On a relative basis, India's macroeconomic fundamentals are good and with financial markets stable post the Fed's rate increase, demand for Indian bonds should be robust.
"We remain bullish on Indian government bonds," Rohit Arora, an interest-rate strategist at Barclays in Singapore, wrote in a December 28 note. "With most markets closed on Jan. 1 and given the ongoing holiday season, we expect a weak quota auction cutoff. Unexpectedly strong demand despite the unusual timing, on the other hand, could be seen as a positive technical signal for broader emerging-market local-currency bond flows in the near term."
Global holdings of Indian sovereign and corporate securities rose by 504 billion rupees this year as tumbling crude oil prices improved public finances in Asia's third- largest economy and helped slow inflation, enabling the central bank to lower benchmark interest rates four times.
Bond risk has plunged this quarter. Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years have dropped 23 basis points since Sept. 30, the most in five quarters, to 160, according to data provider CMA. Ten-year notes pay 552 basis points over similar-maturity U.S. Treasuries, compared with a two-year low of 534 in June.
"The new limits would get filled up as there's a fair bit of interest among foreign investors," said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management, which oversees 892 billion rupees. "On a relative basis, India's macroeconomic fundamentals are good and with financial markets stable post the Fed's rate increase, demand for Indian bonds should be robust."
