Bloomberg
Mumbai


While India’s central bank has good reasons to raise the cap on global funds’ rupee bond holdings, one glance at Asian currency markets explains why it probably won’t.
Schroder Investment Management says raising the $30bn limit on sovereign debt holdings would help Governor Raghuram Rajan achieve a goal of transmitting his three benchmark interest-rate cuts to the real economy. Last week’s devaluation of the yuan, a plunge in the Malaysian ringgit to a 1998 low and the prospect of rate increases by the US Federal Reserve will only reinforce his caution.
“He’s told us many times that he’s worried not too much about inflows but with the reversal,” said Rajeev De Mello, who oversees about $10bn as head of Asian fixed income at Schroder in Singapore.
The “downside of being very cautious on raising foreign limits,” he added, is “yields are quite high and that may not be helping in terms of transmitting the impact of lower rates.”
Allowing higher foreign ownership would boost one of Asia’s most restricted markets and help bring down the cost of borrowing for Prime Minister Narendra Modi’s government, according to DBS Bank. While benchmark 10-year yields haven’t fallen since Rajan started easing monetary policy in January, the governor can point to relative stability in the rupee and slowing inflation as successes.
Rajan said that the Reserve Bank of India is working on a framework to raise investment limits in government bonds and may announce it after gauging the impact of the Fed rate decisions.
Foreign investors hold less than 5% of India’s government bonds, one of the lowest in Asia, according to DBS Holdings.
The rupee tumbled 1.8% last week to 65.0075 a dollar, approaching a two-year low, as volatility surged from near the least since April 2008 on concern a weaker yuan will hurt India’s trade competitiveness.
The currency declined 0.4% to 65.2350 a dollar yesterday.
Three-month implied volatility jumped to 8.65% yesterday, from as low as 5.91% on July 20.