Franklin Templeton shakes up Bond Street with Rs 9,000 crore bulk buy

Source: The Economic Times, July 13, 2017

MUMBAI:Franklin Templeton bought Indian government bonds aggregating Rs 9,000 crore in the second-highest bulk purchase by an overseas investor as Indian yields remain the highest among emerging Asian economies in Asia amid improving macro-economic outlook.

Four people familiar with the transaction said that the fund bought bonds worth about Rs 7,500 crore on Tuesday and Rs 1,500 crore the day before. This is on top of the Rs 15,000-17,000 crore worth of sovereign bonds it bought in March-April.

“The latest reform measures including GST has lifted confidence among overseas investors,” said Shashikant Rathi, head of treasury at Axis Bank. “India would continue to see fresh bout of fund inflows as many global institutions are convinced about the country’s economic prospects.”

Franklin Templeton did not respond to an e-mail seeking comment. Indian bond yields are down 10 basis points in the past week, closing at 6.46% on Wednesday. A basis point is 0.01 percentage point.

Nearly three years ago, on August 20, 2014, Franklin Templeton bought about Rs 16,000 crore on a single day.This is the largest single-day purchase of Indian government securities by a foreign institutional investor.

Yields on Indian government bonds at 6.46% is higher than 3.97% for Malaysia government bonds, and 2.275% for South Korea. Real interest rate, which is adjusted for retail inflation with the benchmark yield, is at an attractive 4.28%.

The rupee’s strength has also helped. This year, the Indian currency ranked fifth among emerging markets yielding 8.80% total returns, according to Bloomberg data. Total investment returns include spot exchange rate and interest income. Mexican Peso topped the list with 20.9%.

On Tuesday, FPIs invested a net of Rs 7,853 crore with gross purchases at Rs 8,907.25 crore, show latest data from NSDL.

International investors have been lapping up Indian securities as many see India as a structural turnaround story with the successful implementation of reforms such as the passage of goods and services tax and the launch of bankruptcy proceedings against defaulters. Furthermore, the government has managed to keep the fiscal deficit in check despite some state governments’ farm loan waivers.

“India’s macro fundamentals are strong and improving,” said Sandeep Bagla, associate director at Trust Capital Services. “With a stable currency this makes our country an attractive destination for overseas investors.

High real interest rate is also sparking off investor exuberance as such rate is mostly not seen in other economies.”

Indian bonds also offer scope for capital appreciation as the Reserve Bank of India may reduce interest rate given the low inflation rate. For June, the consumer price index-based inflation rose 1.54%. The Monetary Policy Committee’s objective is to keep inflation at 4% in a 2% band on either side.

With consumer price pressure easing to record low levels, the RBI may reduce interest rate by at least 25 basis points when it meets to review monetary policy on August 02. Once that happens, bond prices may rally. Bond prices and yields move in opposite directions.

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