Bond funds double holdings in Indian debt

Dec 28 | Updated: Dec 29 2007, 06:03am hrs
Bond funds doubled their holdings of Indian debt, Asias best-performing investment-grade market in 2007, predicting currency gains will stop commodity prices from fueling inflation.

Reserve Bank of India governor Yaga Venugopal Reddy allowed the rupee to appreciate 12.3% in 2007, reducing costs of imported oil, gold and copper. Inflation slowed to a 3.1% annual pace in November, compared with 4.3% in the US and 6.9% in China. Aberdeen Asset Management Plc, and DBS Asset Management Ltd, 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 Rs 2.1 trillion, 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% since June. Currency strength has helped and I see that continuing.

Investors measuring performance in dollars earned 19.4% in Indian debt this year, compared with 8.9% for Treasuries, according to data compiled by HSBC Holdings Plc. International investors bought $2.2 billion, twice as much as 2006, Securities & Exchange Board of India data show. Local banks hold 70% of the debt and broader ownership may help fund $500 billion for roads and ports over five years.

Rising global money-market borrowing costs prompted some investors to shun Indian debt, according to Geneva-based Pictet & Cie, Switzerlands largest closely held private bank. The three-month dollar London interbank offered rate rose 0.86 percentage point above the Feds 4.25% benchmark overnight rate on December 11, the biggest gap since November 1999. 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.

Inflation may accelerate as stagnant harvests force the South Asian nation to import wheat for the third year in 2008. The government will have to increase retail fuel costs should crude oil rise, according to the central bank.