Investors in India are shunning gold while adding to
holdings of government bonds, betting that policy makers will cut borrowing
costs as inflation slows to the least in two years.
Assets managed by funds that buy bullion shrank 4.3 percent
to 91.5 billion rupees ($1.8 billion) in December, while those that trade in
rupee-denominated sovereign debt increased 17 percent to 31.2 billion rupees,
according to the Mumbai-based Association of Mutual Funds in India. Gold
imports by the world’s biggest buyer may slump 48 percent in the three months
ending March from a year earlier, the Bombay Bullion Association said this
month.
Government notes are rallying before data next week that
economists predict will show wholesale prices rose 7.4 percent in December,
compared with 9.11 percent in November, a sign that seven interest-rate
increases last year are taming price pressures. The nation’s 10-year bonds
yield 8.23 percent, 83 basis points more than the inflation forecast. China has
so- called real interest rates of minus 70 basis points, while South Korea’s
are minus 41.
“Indian investors’ sacred affinity toward gold will be
tested by factors like real interest rates and investment opportunities in
other assets,” Ritesh Jain, the Mumbai-based head of investment at Canara
Robeco Asset Management Ltd. that oversees $1.3 billion, said in an interview
yesterday. “Demand for gold in India may fall 25 percent to 30 percent in 2012.”
Borrowing Costs
The metal was being perceived as a hedge against inflation
through last year, Jain said, as increases in wholesale prices held above 9
percent for 12 consecutive months through November. This was especially so in
rural India, where banking facilities “continue to be dismal,” he said.
Funds that buy gold managed 2 percent of total assets
invested by India’s investors in mutual funds at the end of December, compared
with 20 percent overseen by those that trade in bonds due in less than 12
months. Debt securities with maturities longer than a year accounted for 49
percent, while equities made up 23 percent.
The nation’s interest-rate swap market suggests that
borrowing costs will decline. The cost to lock in interest rates for 12 months
dropped one basis point, or 0.01 percentage point, to 7.9 percent yesterday.
That’s 60 basis points below the Reserve Bank of India’s 8.5 percent repurchase
rate. Goldman Sachs Group Inc. predicts policy makers will cut the repo rate by
1.5 percentage points this year, while Deutsche Bank AG estimates a one
percentage point reduction.
Rupee Advances
Global funds are adding to holdings of the nation’s debt
securities before the central bank reviews borrowing costs on Jan. 24.
International investors bought more rupee-denominated notes than they sold for
a seventh consecutive trading day on Jan. 10, boosting their ownership this
month by $1.8 billion to $27.8 billion, according to exchange data.
The purchases are spurring a rally in government bonds and
the rupee. Yields on the nation’s benchmark 8.79 percent notes due in November
2021 have slumped 32 basis points this year after increasing 65 basis points in
2011. The yield rose two basis points to 8.25 percent yesterday, according to
the central bank’s trading system.
The rupee, Asia’s worst-performing currency last year
following a 16 percent slide, gained 0.6 percent yesterday to 51.585 per
dollar, according to data compiled by Bloomberg. The currency has strengthened
2.9 percent in 2012, the best performance among the region’s 10 most-traded
currencies.
Gold Slumps
Gold for immediate delivery, which gained 10 percent in
2011, has slid 14 percent after touching a record $1,921.15 an ounce on Sept. 6
and traded at $1,656.88 in Mumbai yesterday.
Imports of the metal may decline to 150 metric tons in the
three months through March, from 286 tons a year earlier, as the rupee’s 2011
decline boosts prices, Prithviraj Kothari, president of the Bombay Bullion
Association, said in an interview.
“If gold were to correct, especially in the near term, and
the rupee were to remain sideways, it wouldn’t augur very well for the
investor,” Lakshmi Iyer, head of fixed income and products in Mumbai at Kotak
Mahindra Asset Management Co. that oversees $5.7 billion, said in an interview
on Jan. 11. “Sentiment is biased toward investing in fixed income over any
other asset class for now.”
The cost of protecting the debt of State Bank of India,
which some investors consider a proxy for the nation, is climbing as Europe’s
debt crisis dims the allure of emerging- market assets.
Cultural Factors
Credit-default swaps on the lender cost 392 basis points
yesterday after touching a two-year high of 405 on Jan. 9, according to CMA,
which is owned by CME Group Inc. and compiles prices quoted by dealers in
privately negotiated markets. The swaps pay the buyer face value for the
underlying securities should a company fail to adhere to its debt agreements.
With Europe’s sovereign-debt crisis spreading “like a
plague,” gold will continue to attract investment in 2012 because of its appeal
as a haven, according to Reliance Capital Asset Management Ltd.
Demand will also be supported by cultural factors as gold is
an important part of family occasions in India such as weddings, Sundeep Sikka,
the Mumbai-based chief executive officer at Reliance Capital, said in an
interview on Jan. 6. Hindus, who account for about 80 percent of the nation’s
population, also consider buying gold auspicious during religious festivals.
‘Extremely Bullish’
“Demand for physical gold has always been strong in India,”
Sikka said. “The current global macroeconomic environment is very conducive for
higher gold prices. The fundamental outlook for gold remains extremely
bullish.”
Slowing growth in Asia’s third-biggest economy will damp
demand for bullion, according to Canara Robeco’s Jain.
Sales of passenger cars in the nation fell almost 7 percent
from November to 159,325 units last month, according to data from the Society
of Indian Automobile Manufacturers. Gross domestic product will rise about 7
percent in the year ending March, Prime Minister Manmohan Singh said on Jan. 8,
less than a prediction of 7.5 percent he made in December.
India’s bonds have returned 1.2 percent this month, the best
performance among 10 Asian local-currency debt markets monitored by HSBC
Holdings Plc. The difference in yields between rupee-denominated notes due in a
decade and similar-maturity U.S. Treasuries has narrowed 31 basis points in
January to 631.
“With easing of inflation, people aren’t thinking of buying
gold,” Chirag Mehta, Mumbai-based fund manager at Quantum Asset Management
Company, a unit of Quantum Advisors Pvt. that manages about $1.1 billion, said
in an interview yesterday. “Investors are thinking that bond yields have peaked
and it’s a good time to invest in government bonds.”
Source: http://www.bloomberg.com/news/2012-01-12/bonds-beating-gold-for-funds-on-slower-inflation-india-credit.html
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