Top Rupee Bond Funds Stay Bullish During Best March for 13 Years

India’s best-performing debt-fund managers are predicting more gains for sovereign bonds as benchmark notes head for their best March in 13 years.

The 10-year Yield will drop at least 25 basis points in six months from 7.51 percent on March 23, according to ICICI Prudential Asset Management Co. and Kotak Mahindra Asset Management Co., which delivered the first- and second-best returns over the three months to March 22. That would add to the 12 basis point drop since Feb. 29, which exceeds the biggest decline in any March since 2003. The forecasts are more aggressive than the median analyst estimate for a three basis point fall by Sept. 30.

The rally in bonds is set to break a jinx that had made March the worst period for Indian sovereign debt in the previous decade. Foreign investors have turned net buyers as Prime Minister Narendra Modi’s commitment to cut the budget deficit to a nine-year low combined with the most benign inflation in four months. Both local funds said yields will keep falling as the Reserve Bank of India lowers its 6.75 percent benchmark rate as much as 50 basis points in 2016.

“There are more legs to the rally,” said Lakshmi Iyer, who helps oversee $8.25 billion as head of fixed income at Kotak Mahindra. “The government adhering to fiscal discipline, reduction in the administered interest rates on savings and inflation remaining subdued has led to a rally in bonds. What’s happening is all these have led to anticipation that these factors will lead the RBI to cut rates further.’’

Emerging-market debt has climbed this month as global growth concerns eased and the Federal Reserve signaled a slower pace for U.S. interest-rate increases. The Bloomberg Emerging Market Local Sovereign Index has gained 3.2 percent in March, heading for its best month since 2013.

The Kotak Gilt Investment Provident Fund and Trust Plan overseen by Iyer has returned 3.46 percent over three months, the second-best performance among mutual funds investing in medium- and long-term sovereign debt with at least $100 million in assets, according Value Research India Pvt. The ICICI Prudential Gilt Fund is the top performer in the category with 3.48 percent.

Budget Restraint

The government indicated in February it will keep the deficit target at 3.5 percent of gross domestic product, the lowest since March 2008. Consumer-price inflation slowed to 5.18 percent in February, data showed March 14.

India’s 10-year yield sank to 7.50 percent on March 21, the lowest close since July 2013 for a benchmark 10-year security. Rupee sovereign debt has gained 1.8 percent so far this month, the most since September. Local markets were shut Thursday and Friday for public holidays.

RBI Governor Raghuram Rajan has kept interest rates on hold since September and said last month that a prudent budget as well as contained inflation were pre-requisites for further easing. He also said that the economy showed signs of weaker momentum, “pulled down by slackening agricultural and industrial growth,” according to a statement on Feb. 2.

Rajan, who reduced benchmark borrowing costs by 125 basis points in 2015, next reviews policy on April 5.

“Inflation in India will be anchored well around 5 percent,” said Rahul Goswami, chief investment officer for fixed income at ICICI Prudential Asset Management, which manages 1.7 trillion rupees ($25.8 billion). “The central bank has scope for lowering the benchmark rate” amid global deflationary pressures and weak commodity prices, he said.

Growth Headwinds

Goswami said he favors quasi-government bonds such as state debt and long-term sovereign securities. Growth faces several challenges such as “lower capacity utilization, weak rural demand, non-performing assets and global economic headwinds,” he added.

The outlook for further rate cuts and an easing in global market turmoil has brought foreign investors back to Indian debt. Global funds boosted holdings of government and corporate notes by 44.9 billion rupees in the past two wees, National Securities Depository Ltd. data show. That’s helped take net inflows for March to 24.7 billion rupees, after last month saw withdrawals of 87.6 billion rupees that were the biggest since April 2014.

Bets the RBI will add to stimulus have also increased after the Modi administration reduced rates on state-run saving plans, said Kotak’s Iyer.

The government’s move seeks to address concern that the higher returns on state-run saving plans tend to cannibalize banking system deposits and thus prevent lenders from transmitting reductions in the RBI’s benchmark repurchase rate to customers.

“Most of the uncertainties such as the budget and the Fed meet are out of the way and we don’t think inflation will throw a negative surprise,” said Iyer, who sees inflation slowing to RBI’s 5 percent target. “The way all the factors are shaping up suggests a benign outlook for Indian bonds.’’

--With assistance from Shikhar Balwani To contact the reporters on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net, Nupur Acharya in Mumbai at nacharya7@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Sandy Hendry

By: Kartik Goyal and Nupur Acharya

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