Sell Indian Bonds, Buy Equities as Rate Cuts End, SocGen Says

By Patricia Lui

May 7 (Bloomberg) -- India’s bond rally is ending as the central bank stops cutting interest rates and the government steps up debt sales to fund its budget deficit, Societe Generale SA said.

Indian equities now represent a better investment given the Reserve Bank of India has limited room to reduce borrowing costs further and global funds and overseas Indians are returning to the stock market, said Balakrishnan Kunnambath, head of the Indian subcontinent region at SG Private Banking, SocGen’s wealth management unit.

“It’s time to slowly start moving out” of Indian debt, Kunnambath said in an interview in Singapore yesterday. “There’s no point in going in now as rate cuts are limited.”

India reduced its overnight lending rate, or repurchase rate, six times since mid-October to 4.75 percent and cut the reverse-repurchase rate four times to 3.25 percent. Both are at their lowest levels since they were introduced in 2000. Policy makers may lower the rates further by no more than half a percentage point, Kunnambath said.

Indian bonds have returned 21 percent since the end of June, the third-best performance among 10 local-currency debt markets in Asia, according to indexes compiled by HSBC Holdings Plc.

The 6.05 percent note maturing in February 2019 yielded 6.17 percent yesterday and touched 4.96 percent on Jan. 2, near a record low reached in October 2003. Benchmark 10-year yields are down from as high as 9.48 percent on July 15.

The government plans to sell a record 2.41 trillion rupees ($48.6 billion) of local-currency bonds in the six months through September.

Rupee, Equities

India’s rupee may appreciate 5 percent to 6 percent in 12 months as signs of a global economic recovery increase demand for riskier assets, Kunnambath said.

“Offshore sentiment on the rupee has improved and non- resident individuals seem more willing to take on exposure as risk appetite improves,” said Kunnambath, who advises both onshore and offshore Indian clients at the bank.

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has rallied 24 percent this year, following a 52 percent plunge in 2008. Overseas investors have bought $457 million more Indian shares than they sold this year, compared with a record $13.3 billion in net sales last year.

The rupee traded at 49.62 per dollar yesterday after climbing more than 4 percent in the past two months. The currency tumbled 19 percent last year, the biggest drop since 1991.

To contact the reporters on this story: Patricia Lui at plui4@bloomberg.net