Maxed out in federal debt, foreigners target India states
singapore — With overseas investor limits for India’s high-yielding sovereign debt almost used up, bond funds are starting to buy up state notes. Problem is, finding decent data on the local economies.
Aberdeen Standard Investments started buying the securities about three months ago and they now account for about a fifth of its $312 million Indian bond fund, said Lin Jing Leong, a fixed-income investment manager in Singapore. Finding timely figures on the states, even ones like Maharashtra, of which Mumbai is the capital, is challenging, she said.
“Maharashtra was one of the hardest states to look at in terms of bottom-up economic analysis,” Lin said. “It was even difficult finding a document with numbers on the most recent budget. Last year’s GDP growth numbers are still not out for some of the states.”
The highest yields among major Asian emerging markets have made Indian government debt a favourite with overseas investors, who have pumped about $20 billion into rupee securities this year.
State bonds, which offer an extra 60 to 70 basis points of yield over the sovereigns, trade at very similar levels despite differences between the local economies. That’s because the Reserve Bank of India has a zero per cent risk rating on the notes, meaning domestic investors treat the unrated securities like federal debt.
Foreigners are a bit more wary. The lack of differentiation in spreads means Nomura Asset Management favours debt from states with stronger finances, said Simon Tan, a fund manager in Singapore, who oversees Nomura’s Indian bond fund. While Tan started buying the debt in 2015, it still makes up less than one per cent of the fund’s $1.75 billion of assets.
“We’d like to increase our exposure but are unlikely to until the liquidity situation improves,” Tan said.
Is a solution at hand? The Reserve Bank in its October policy document said it would release high-frequency data on state finances available with it, and hold state bond auctions on a weekly basis. Improving liquidity by reselling debt and buybacks is also on the cards.
Loan waivers
Inadequate data apart, large supply of state debt is also a concern as local governments need funds for higher pay for their staff and farm loan waivers. Net borrowing by states is estimated to rise to ₹3.8 trillion ($58 billion) in the year to March, up 12 per cent from the previous year, said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered in Singapore. States are due to sell up to ₹1.3 trillion of bonds in the December quarter, as per RBI.
Overseas funds had used up 14 per cent of their state bond quota as Monday, versus almost 100 per cent of the sovereign limit, data from NSDL show. In the long-term investor category, none of the state quota has been filled, while 79 per cent has for central government notes.
‘Interesting opportunity’
Aviva Investors isn’t in the state bond market yet, but is looking at it closely, said Stuart Ritson, the Singapore-based head of Asian FX and rates. “Foreign involvement in the market is picking up from a very low base,” he said. “That for us is quite an interesting opportunity.” — Bloomberg