Local investors are exiting Indian debt funds at the fastest
pace since September, a sign of more losses ahead for bonds that are the worst
performers among the largest emerging markets this quarter.
Fixed-income funds saw an outflow of Rs.2,500 crore in
April, a third straight month of withdrawals, data from Association of Mutual
Funds in India (AMFI) show. Investors left just in time to avoid a global bond
market rout that saw the benchmark 10-year rupee sovereign yields surge 19
basis points in the last two weeks.
Birla Sun Life Asset Management Co. and Tata Asset
Management say returns could worsen further as a rebound in oil prices and a
drop in the rupee limit the scope for the Reserve Bank of India (RBI) to cut
interest rates. Investors in Indian government notes lost 0.5% this quarter,
compared with returns of 7.3% in Russia, 3.5% in Brazil and 1.1% in China
securities, JPMorgan Chase and Co. indexes show.
“We may not see the kind of returns expected earlier,” said
A. Balasubramanian, chief executive officer (CEO) at Birla Sun Life in Mumbai.
“Oil’s reversal can be a source of volatility as far as inflation is concerned.
The rates trajectory won’t be the same and markets will adjust to the new
indicators on oil and the monsoon.”
The rupee’s drop past the 64 a dollar level on Thursday
reduces chances of an interest-rate cut at the central bank’s 2 June meeting,
according to Bank of America Merrill Lynch.
‘Equity-like returns’
The 10-year sovereign yield jumped 13 basis points, or 0.13
percentage point, in April, the most since September 2013, as a 21% rally in
Brent crude and the weather department’s forecast of below-normal monsoon rains
reignited concern about consumer inflation, which eased to 5.17% in March.
Brent prices are key to India’s inflation outlook as the
nation imports about 80% of its oil and the commodity’s 49% plunge in the 12
months through March helped slow price gains, paving the way for two
interest-rate cuts in 2015.
Fixed-income funds took in Rs.12,200 crore in January, AMFI
data show. That’s when RBI governor Raghuram Rajan lowered benchmark borrowing
costs for the first time since May 2013. Investors withdrew Rs.11,600 crore in
the next three months.
“We saw a lot of traction into the income funds around
January as distributors and analysts sold them as ‘get equity-like returns in
debt,’ which was too good to be true but some people did bite into the story,”
Killol Pandya, a senior debt-fund manager at LIC Nomura Mutual Fund Asset
Management Co. in Mumbai, said in a 7 May phone interview. “Expectations were
that a lot of rate cuts will happen and they’ll be front-loaded, but that whole
sentiment has seen a reversal.”
Monsoon rains
Inflows into so-called gilt funds, which invest solely in
sovereign debt, slowed to Rs.1,640 crore in April, the smallest since
September, according to AMFI data.
The June-September monsoon season is crucial for Asia’s
third-largest economy as agriculture accounts for about 15% of its gross
domestic product (GDP). Insufficient rains can potentially hurt crop output and
stoke food costs.
The RBI will consider factors including the “likely
strength” of the monsoon rains before deciding on future actions, Governor
Rajan said in the latest policy statement on 7 April when he kept the benchmark
repurchase rate unchanged.
“There’s a chance that the June rate cut gets pushed back
because of the rebound in oil prices and the rise in global bond yields,”
Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management
Pvt., a unit of India’s largest lender, said in a 8 May phone interview. “The
sudden drop in the rupee will also impact monetary policy. To that extent,
investors will position themselves.”
‘Damage done’
LIC Nomura’s Pandya said he doesn’t expect large outflows
from debt funds because interest rates are still headed lower, even if less
than earlier expected.
“The damage is already done,” Pandya said. “Investors who
are risk averse and expect a reasonable rate of return will continue to stay
invested in these funds. There is money to be made, just maybe a bit less than
before.”
Swap traders are paring bets for easing. The cost to lock in
borrowing costs for a year climbed nine basis points in April, data compiled by
Bloomberg show. It is unchanged in May.
The rupee slumped 1.5% in April in Asia’s worst performance
as foreign inflows into Indian bonds and stocks slowed from previous months.
Overseas funds sold a net $494 million of rupee-denominated debt on 7 May, the
biggest single-day outflow since 14 January, amid a global selloff.
“The fixed-income segment may not look the same as it did a
quarter back,” said Arvind Sethi, the Mumbai-based CEO at Tata Asset, which
manages Rs.27,000 crore. “Some of the optimism built in the yields will correct
from here on.” Bloomberg
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