BLBG:Rupee Rebound Seen in Singh Pledge to Open Retail Investment: India Credit
India’s rupee, the worst-performing currency in Asia this year, will post the region’s best returns in 2012 as strategists predict Prime Minister Manmohan Singh’s pledge to open the retail industry will spur foreign investment.
“India remains committed to a system of regulation that is supportive of enterprise,” Singh said in an interview in his Parliament House office in New Delhi on Dec. 14. “We will do everything to encourage foreign investment.”
Global funds increased holdings of rupee-denominated debt by $3.1 billion this month, the most on record, amid speculation that slowing inflation will allow the central bank to stop raising interest rates. The 8.49 percent yield on the nation’s 10-year rupee-denominated bonds is almost five times that for the U.S. and 500 basis points more than China’s.
Dollar-based money managers will earn 19 percent including interest on rupee investments by December 2012, almost twice the returns on South Korea’s won, according to analysts’ estimates compiled by Bloomberg. The rupee, down 15 percent against the dollar this year, strengthened 1.8 percent to 52.69 per dollar today. The currency will gain 7.5 percent to 49 by the end of next year, the median forecast of 19 strategists surveyed by Bloomberg shows.
Pressure from opposition lawmakers forced the government to suspend its plan last week to allow companies such as Bentonville, Arkansas-based Wal-Mart Stores Inc. to operate in India. While policy makers say that the entry of foreign retailers will help curb price growth, opposition parties say the move will wipe out small shopkeepers’ jobs. Singh said that his government will pursue the proposal next year “as inflation will come down by then, which will strengthen the confidence in our government.”
Food Inflation
India’s wholesale-price index rose 9.11 percent in November from a year earlier, the least in 12 months, government data showed this week, contributing to a 25-basis drop in benchmark yields in December. Food inflation in the nation was 4.35 percent in the week ended Dec. 3 from a year earlier, the least since February 2008, Commerce Ministry data showed yesterday.
Yields on 8.79 percent bonds due in November 2021 were little changed at 8.49 percent before today’s monetary-policy review. The central bank will leave the repurchase rate unchanged at 8.5 percent, according to all 14 economists in a Bloomberg survey.
Sensex Slides
Global funds have raised their ownership of rupee- denominated bonds by $7.6 billion this year to a record $25.2 billion, attracted by the yield advantage over U.S. Treasuries. The difference in yields between India’s sovereign notes and similar-maturity U.S. debt was 657 basis points, or 6.57 percentage points, compared with 462 basis points at the end of last year.
“Opening up the retail industry will create positive sentiment,” Ravi Ranjit, chief manager at Mumbai-based Federal Bank Ltd., said in an interview yesterday. “There will be an expectation of dollar inflows.”
While international investors have added to holdings of India’s debt, they have cut ownership of the nation’s shares. Foreign funds sold $311 million more local equities than they bought this year, according to exchange data, contributing to a 22 percent drop in the BSE India Sensitive Index.
“There are short-term issues sometimes, over which we don’t have any control,” said Prime Minister Singh, who led the Reserve Bank of India for three years from 1982. “I am sure investors are wise enough to distinguish between short-term aberrations and long-term prospects. We will make every effort to make India an eminently bankable and credit-worthy economy.”
Default Swaps
The cost of protecting the debt of State Bank of India, considered a proxy for the nation, has dropped nine basis points from this year’s peak of 395 basis points reached on Oct. 4, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Global funds will want to see “action, more than words” before investing further in India, according to Mumbai-based Development Credit Bank Ltd.
“There would have to be a huge improvement in the political and policy scenario before we see inflows,” Naveen Raghuvanshi, a Mumbai-based currency trader at Development Credit Bank, said in an interview yesterday. “The market would have to stabilize first. I don’t see any improvement for now.”
Raghuvanshi predicts that the rupee may drop to 55.50 per dollar by the end of the month.
‘Noble Thought’
Singh’s pledge is a “noble thought” and will boost confidence among global investors, according to Crisil Ltd., the Indian unit of ratings company Standard & Poors.
“The path of opening up and attracting foreign investment is irreversible,” Dharmakirti Joshi, a Mumbai-based economist at Crisil, said in an interview yesterday. “I expect foreign investment to increase gradually.”
India’s bonds have returned 1.7 percent this month, the third-best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.
Growth in India’s economy should spur investor confidence in the nation, according to Singh. India’s gross domestic product will rise 7.5 percent in 2012, more than four times the rate of growth in the U.S. and the euro zone, according to the International Monetary Fund.
“India means business, and we have been growing around 7.5 to 8 percent,” Singh said. “Where else will you find an economy of India’s size maintaining such growth.”
To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Sandy Hendry at shendry@bloomberg.net
