Thursday, December 19, 2013

Monday, December 16, 2013

Is Indian Debt Market closer to Global Bond Index Inclusion?

All markets have been fearing the impact of likely US Taper, likely announcement to happen over this week with cut backs to start as early as January.  Interestingly, Indian bond markets have seen sharp inflows in the last one week, despite the slew of good economic data in US. Tbills and dated securities have been bought by FIIs to the extent of INR 2000 Cr each, intense buying post the CPI data. 

Most of the dated securities buying has been by the Longer term investors (like Sovereign wealth funds, Pension funds, Insurance funds etc.). Buying of Tbill at the current USDINR forward levels suggest the FIIs' comfort on USDINR spot as well - as they can't be hedging when the forward levels are so high (8.25%+LIBOR).

Are we closer to bond index inclusion than what the local markets believe?

Source of Data: NSDL

Monday, December 09, 2013

Must Read article for India Fiscal watchers

This article is a must-read for fiscal watchers. Seeing through the fiscal math with reasonable 'comparable' numbers - India is heading towards a fiscal cliff.  I have not done the checking of the figures here, assume Business Standard would have already done it.

Link from Business Standard

New 10Y bond heading to 9% handle

The Economics affairs secretary just made a press statement that Indian Government will conduct the much feared "Debt-Switch" programme in the market and not with RBI as was previously expected by the market considering the high yield levels.

This practically means INR 50000 Cr of debt supply to the market at a time when there is little interest in the secondary market; even PFs are opting for the yield pick-up from Corporate bonds and State Development loans post the recent change in investment pattern norms.

Even if Government buys back G-Secs maturing in 2015, 2016 and 2017 and issues, say, 15Y papers, the net duration in the market is going to raise sharply. All set for 9% mark even in the new 10Y bond in few trading sessions from now.

Reuters link

Wednesday, November 20, 2013

IFC Rupee Bond success

IFC issued INR 1000 Cr of bonds to global investors which has been lapped up happily by foreign investors. For starters, it is a 3 year bond which got issued at coupon of 7.75%. The money collected by IFC will be invested into Indian companies and the investors take the currency risk. It leads to the question what are the foreign investors trying to tell us with the cut-off for the bond issue.

This leads to a direct question of why the coupon has been fixed at 7.75% not close to 9.25% where current 3Y corporate issues (AAA) should be trading at - as the currency risk is with the investors. 

As per my understanding, the intermediation of IFC is taking care of two main risks for which the investors are sacrificing close to 150 bps of yield pick-up despite taking on currency risk on INR:
1. Credit Risk: Even if the Indian corporates to whom IFC lends money defaults, the investors will still get back the money in INR terms. It is to be noted that IFC is AAA rated in $ terms.
2. Convertibility risk: Investors are assured of dollars at the end of 3 years; they are exposed to capital gain / loss depending on INR spot levels but they need the assurance of getting the dollars at the end of three years. Without IFC mediation, they could end up not being able to convert the INR into dollars - sounds like a risk India might totally stop outflows if things go further wrong from here.

Just for the record,US Treasuries for 3Y are at 0.60%; 5y BBB- (India rating) spread is close to 300 bps. Hence, India's dollar yield should be close to 3.60% for 3 years. For corporates, there would be a further spread of 60-70 bps taking the Corporate yield in dollar terms to 4.30%.  With INR yield of corporates trading at 9.30%, the IFC issue of 7.75% suggests foreign investors are pricing in the credit risk of AAA Indian corporates and Convertibility of INR to USD at 155 bps. 

Business Standard Link

Monday, November 11, 2013

10Y yield above 9% - Investors to come in next?

There have been quite a few calls on TV in the last couple of days about shifting of assets from Equities to Debt. It is not counter intuitive given the fact 10Y GoI Security had found itself only few times above 9% in the last 10 years. Though past data could be insufficient to explain future price action, it need not be completely ignored.

Following is the histogram of 10Y yield on closing basis:
With Current 10Y yield at 9.05% (1.4% event in last 10Y), it is only natural to see longer term investors coming into the market. Hopefully.

Tuesday, August 27, 2013

Inflation Indexed Bonds better than Tax Free Bonds

10Y inflation indexed bond issued by Government of India is giving a real yield of 3.47% - at WPI expectation of 6% it gives an IRR of 9.96% which is significantly better than the IRR of 8.70% for 7.16% 2023 bond which is the current 10Y.  The IRR of the bond at various WPI expectations are as per the following table:

Average WPI expectation for next 10Y
IRR of the 10Y Inflation Linker at CMP

The key item of note in this case is the low coupons of the bond – it can be considered a zero coupon bond with little reinvestment risk; add to that the long term capital gains on maturity will have indexation benefit as well and hence materially tax efficient. 

To summarize, Inflation Indexed Bonds:

  •  Have Less Reinvestment Risk
  • Are a good hedge against WPI increases, especially in a period when imported inflation is a genuine reality
  • Have Low Coupons meaning lower tax on coupons (slightly redundant to cite, I agree)
  • Are Tax efficient on capital gains as Indexation benefits get applied

Leave all the tax free bonds and buy this sovereign rated Inflation Linker.

Good way to buy GSec for Retail investors who do not hold CSGL accounts IDBI Samriddhi Portal

Update: I have made this post sometime in August and now Foreign institutions are queueing up in advising institutional clients to get into IIBs. Please find the link here of the report from Barclays.

Why WPI IIB is better than CPI IINSS?
Indexation benefits of WPI IIB 

Monday, August 26, 2013

INR – Target 60-61/$ - Next 3 Months

Factors behind the Current INR Downmove:
Outflows: The major weakness in INR began in the second half of May where significant outflows happened from Debt aggregating close to $9 Bn and Equity outflow of close to $1 Bn. 

CAD Concerns: Spike in Gold Imports on the back of Govt. action on increasing duties. Though expected to be front loading of the year’s gold demand, the resulting imbalance along with the Capital outflows exacerbated and quickened the down-move.

Debt Repayments: As a consequence of the negative sentiment on the currency along with QE Tapering Concerns, INR along with most EM peers faced severe depreciation pressures raising concerns about ability to raise fresh funds overseas and hence repaying capacity of existing debts.

External Debt Profile
  • India’s external debt, as at end-March 2013, was placed at US$ 390.0 billion showing an increase of US$ 44.6 billion or 12.9 per cent over the level at end-March 2012.
  • The share of short-term debt in total debt, by original maturity, was 24.8 per cent. Based on residual maturity, short-term debt accounted for 44.2 per cent of the total external debt as at end-March 2013. Of this, the share of NRI deposits was 28.4 per cent.
  • The residual maturity profile and comparable countries’ debt profiles are as per the following tables:

Residual Maturity
< 1Y
1Y to2Y
2Y to 3Y
> 3Years
Total External Debt ($Bn)
Corporate Debt ($Bn)
Sovereign Debt ($Bn)
NRI Deposits ($Bn)

CAD as % of GDP
South Africa

Emerging Market Currency Performance:
The following table lists the relative performance of various EM currencies; INR’s performance is comparable to IDR and BRL though better than ZAR – mainly reflective of the higher CAD. With CAD% likely to go down this year to -3.7%:

Recent Movement in Foreign Currency Reserves
The Foreign currency reserves of the country have trended lower in the last 6 months – an indicator of the central bank intervention in the FX market.  With 44% of total external debt being short term, further erosion of FX reserves can be a major risk factor looking ahead. Hence, the capital raising efforts of the Government (the recent measures) would turn out to be “necessary” sooner than later.

Recent Measures announced to support INR
Following are the key measures announced by the Finance Minister in the last 2 weeks
  • Easier overseas borrowing norms, especially for oil companies ($6 Bn): Two changes done in this regard – one, oil companies are allowed to raise $4 Bn to meet working capital requirements; two, subsidies of MNCs are allowed to raise debt from parent companies – expected to raise $2 Bn
  • Liberalization of the non-resident India (NRI) deposit scheme ($1 Bn)
  • Issuance of quasi-sovereign bonds ($4 Bn): Three public-sector financial institutions are expected to raise $4Bn by issuing quasi-sovereign bonds. Sovereign wealth funds can invest up to 30% in the INR 480bn of tax-free bonds to be issued by public-sector financial institutions. If fully utilised this could provide another $2 Bn of additional inflows in the remainder of FY14.
  • Import duty hikes: Gold and Silver import duties have been hiked to 10% from 8% and 6% respectively; going by recent record, this is not likely to provide immediate impact.

Expected Outcome
Credit Growth
RBI Intervention: continuation of periodic central bank action
Positive: Direct impact. Medium term impact is bad owing to erosion of reserves
Negative: as liquidity is expected to become tighter
Continuation of Tight Liquidity Conditions
Neutral: Positive flows in debt likely to be offset by negative flows from equity
Negative: Direct impact.
Negative: NPA concerns to rise
External Fund Raising (incl quasi sovereign, NRI Depo & ECBs)
Positive: Ease funding concerns and positive capital flows
Positive: Can potentially lead to early relaxation of tight liquidity measures
Positive: Similar to Rates impact, headwinds are reduced

If the planned inflow of $11 Bn does happen, a 50% retracement of the last 6M move can be expected – with INR trading close to 60-61/$. Current 3M Outright Forward is ~ 65.50/$ : Target of 61/$ corresponds to a 7% absolute return objective.