Indian bonds make best Asian gains in 2007

New Delhi: Bond funds doubled their holdings of Indian debt, Asia's best-performing investment-grade market in 2007, predicting currency gains will stop commodity prices from fuelling inflation.

Reserve Bank of India Governor Yaga Venugopal Reddy allowed the rupee to appreciate 12.3 per cent this year, reducing costs of imported oil, gold and copper. Inflation slowed to a 3.1 per cent annual pace in November, compared with 4.3 per cent in the US and 6.9 per cent in China.

Aberdeen Asset Management Plc, Scotland's largest independent money manager, and DBS Asset Management Ltd, part of Southeast Asia's biggest lender, are buying Indian bonds to profit from higher prices and the stronger rupee.

Debt funds in India, including local units of Deutsche Asset Management and ING Investment Management, more than doubled this year to Rs2.1 trillion ($54 billion), according to data compiled by the Association of Mutual Funds in India.

"India is bucking a regional trend of higher inflation," said Edwin Gutierrez, who helps oversee $5.5 billion of emerging-market debt in London at Aberdeen-based Aberdeen Asset, which increased its India debt holdings 50 per cent since June.

"Currency strength has helped and I see that continuing."

Expensive funding

Investors measuring performance in dollars earned 19.4 per cent in Indian debt this year, compared with 8.9 per cent for Treasuries, according to data compiled by HSBC Holdings Plc. International investors bought $2.2 billion, twice as much as last year, Securities & Exchange Board of India data show.
Local banks hold 70 per cent of the debt and broader ownership may help fund $500 billion for roads and ports over five years.

India's local currency bonds are rated BBB- by Standard & Poor's, the lowest investment grade. They returned 6.3 per cent in 2007, second only to Indonesia among 10 Asian debt markets outside of Japan, according to London-based HSBC. Indonesia's bonds, rated BB+, returned 9.8 per cent.

Rising global money-market borrowing costs prompted some investors to shun Indian debt, according to Geneva-based Pictet & Cie, Switzerland's largest closely held private bank.

"Funding is getting expensive" for investors borrowing dollars to buy rupee debt, said Ting Wee-Ming, who helps manage $2 billion of emerging market debt at Pictet in Singapore. "Indian bonds might not be attractive now."

At a glance: Inflation falls to 3.1%

- Inflation in India slowed to a 3.1 per cent annual pace in November, compared with 4.3 per cent in the US and 6.9 per cent in China.

- The yield on the 5.48 per cent bond due in June 2009 fell to 7.7 per cent yesterday from a six-year high of 8.19 per cent in April. The price rose to 97 from 95.95. The 10-year yield declined to 7.82 per cent from a 4 1/2-year high of 8.4 per cent in July 2006.

- The three-month dollar London interbank offered rate rose 0.86 percentage point above the Fed's 4.25 per cent benchmark overnight rate on December 11, the biggest gap since November 1999.