With an average yield of approximately 7.8%,i which is almost 6% greater than similarly dated Government of Canada bonds,ii Indian bonds are among the most attractive solutions for income-seeking investors.
While higher yields are typically associated with risky junk bonds, this is not the case for Indian bonds, as more than 90% of India’s bond issues, both sovereign and corporate debt, are rated investment-grade or higher.iii
“Although Indian bond yields are expected to fall on the back of further anticipated interest-rate cuts by the Reserve Bank of India, they will still remain high compared to low-yielding bonds issued by developed countries such as Canada and the U.S.,” says Christine Tan, Chief Investment Officer with Excel Investment Counsel Inc.
Falling inflation led the Reserve Bank of India to cut interest rates by a total of 125 basis points last year, with further cuts expected in 2016. iv
Incidentally, “Declining crude oil prices have helped to improve public finances in India, facilitating slower gains in consumer prices and helping to spur growth. The Indian economy has continued to expand at a robust pace, while most major, developed markets are experiencing contraction,” says Ms. Tan.
Adding to a sound macro environment, Ms. Tan notes that, “India’s currency is one of the strongest among emerging market currencies.” Over the past 5 years, the Indian rupee has returned close to 45%, through both currency appreciation and yield generated from the government holding Indian sovereign bonds, while the Canadian dollar has only given back around 5% to investors during the same time frame.v
With India’s gross domestic product forecasted to grow by 7.8% in 2016,vi investors are also taking comfort in the fact that the nation’s fiscal and monetary conditions are improving and foreign reserves are at record-high levels, which makes the economy more resilient to external shocks.
India’s Bond Market Projected to Expand with New Issues
As India’s economic growth accelerates under Prime Minster Narendra Modi, it is anticipated that debt will play a significant role in the country’s development, especially in infrastructure financing. As a result, India’s bond market will become larger and potentially more attractive to investors. By 2030, the Indian bond market is projected to expand by approximately 13%, from a current size of USD 1.3 trillion.vii
The relaxation of foreign investment limits on domestic bond issues has also resulted in an increase in demand for Indian bonds.
The Rise of Rupee-Denominated Bonds
Historically, India primarily issued hard-currency debt, mostly in U.S. dollars. However, in recent years India’s focus has shifted to rupee-denominated bonds. Local-currency debt reduces hard currency liabilities and exposure to foreign currency fluctuations; and lessens the dependence on external debt, subsequently making local-currency bonds a safer bet.
Rupee-denominated debt returned 8.1% in 2015 and has been the best performer among its emerging market peers since the end of 2013, giving back around 26% to investors. Chinese bonds were a close second, returning a positive 20% during that same time. viii
Furthermore, a handful of prominent money managers, including Pacific Investment Management Company and Aberdeen Asset Management, have pinpointed Indian local-currency bonds as a sweet spot in the fixed-income market, based on “attractive carry [yield] and the potential for capital appreciation due to further rate cuts [by the Reserve Bank of India].” Bond prices move higher in a falling interest-rate environment.
About Excel Funds
Founded in 1998, Excel Funds Management Inc. offers an award-winning suite of emerging market strategies, catering to a broad range of investor profiles and objectives. Leveraging a global network of over 500 portfolio managers and 200 research analysts, our team has firsthand knowledge of the markets in which they invest – providing us with a true competitive advantage over our peers.
Our investment philosophy is grounded in disciplined fundamental research and continuously seeks out new growth opportunities in the emerging markets and beyond. Our on-the-ground sub-advisers and proprietary asset allocation models contribute to the firm being recognized as “The Authority in Emerging Markets”.
- Bloomberg data, as at December 31, 2015. India yield represented by 10-year Indian government bond.
- Bloomberg data, as at December 31, 2015. Canada represented by 10-year Canadian government bond.
- Bloomberg data, based on Indian AAA corporate-bond yield curve, as at January 5, 2016.
- Bloomberg data, accessed on January 25, 2016.
- Bloomberg data, 5-year total return in CAD terms, as at December 31, 2015.
- World Bank, Global Economic Prospects, January, 2016.
- Moody’s Investor Services data, accessed on January 15, 2016.
- Bloomberg Business, Why Fund Managers Love Indian Bonds, January 3, 2016.