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Indian Bonds Poised to Benefit from Falling Rates

Indian bonds have not traditionally been on the radar of many Canadian investors. That may be about to change as India's government gradually lifts restrictions relating to foreign investments, and new products simplify the buying process.

When professional bond traders conduct research, they examine both macro and micro issues affecting a country's bonds. Macro factors include such variables as the national economic growth rate, inflation expectations, interest rates, security and the global risk appetite. Micro issues range from the health of an issuer's business, market and financials, to the strength of its management.

Investment grade Indian bonds look attractive by these standards, say portfolio managers at Excel Funds and its sub-advisor in India, Birla Sun Life Asset Management Company Ltd. ("Birla").

For starters, Indian companies are enjoying the support of one of the fastest growing economies in the world, which should translate into stronger balance sheets. In fact, the International Monetary Fund forecasts that 17 percent of global growth this year will come from India's economy. That compares with an expected input of just 1 percent from Canada and 7 percent from Europe.

Soaring economies can be a warning for bond investors because they usually cause inflation. Inflation, in turn, means higher interest rates, which push down bond prices, hurting the investor (declining rates do the opposite).

In India, however, inflation is declining, partly because energy costs have tumbled. Between 2009 and 2014, the consumer price index ("CPI") fell to 5.8 percent, from 15 percent. By next year, India forecasts CPI at approximately 5 percent.

As the United States prepares to begin tightening monetary policy, there's a strong argument to be made that India will continue to move in the other direction, which is good news for Indian bonds. The central bank has already cut rates twice this year, by 25 basis points in January and March. The overnight rate now stands at 7.5 percent, and the consensus view is that it will decline another 50 to 100 basis points this year.

The Reserve Bank of India and India's Prime Minister, Narendra Modi have united to tackle inflation, says Ashish Kela, a fund manager with Birla in Mumbai, the sub-adviser of Excel Funds' new closed-end fund, the Excel India Growth & Income Fund.

They have set a target of 4 percent by 2018, recognizing that they must stabilize inflation if the country is going to attract foreign investment, he adds.

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