Gold Silver Reports — Pacific Investment Management Co. says the growth trajectory and financial health of India’s economy will support rupee bonds regardless of who helms the central bank. That may soon be someone other than Governor Raghuram Rajan after a newspaper report said he’s not seeking a 2nd term.
While Rajan as Reserve Bank of India chief has had a “notable” influence in stabilizing the rupee, there’s also been a broader improvement in the nation’s finances, according to Luke Spajic, head of portfolio management for emerging Asia at Pimco, which oversees about $1.5 trillion in assets globally. Speculation around Rajan’s future has amplified since a member of Prime Minister Narendra Modi’s ruling party called for him to be dismissed when his 3-year term ends early September.
“Currency stability and country performance are really based on better economic fundamentals,” Singapore-based Spajic said in a phone interview. How any change at the RBI’s helm will impact the rupee is a “very difficult assessment to make,” he said.
Global funds including Western Asset Management Co. aren’t comfortable with the prospect of losing Rajan, who boosted India’s foreign-exchange reserves to all-time highs and helped cut rupee swings by more than half since taking office. Even so, Modi’s government has been instrumental in narrowing the current-account deficit by curbing gold imports, while seeking to reduce bureaucracy, accelerate infrastructure construction and limit the budget shortfall to nine-year low.
India’s world-beating economic growth accelerated a more-than-estimated 7.9 percent in the January-March quarter from a year earlier, official data showed Tuesday. For the financial year through March, the economy expanded 7.6 percent, in line with official forecasts, and up from 7.2 percent in the previous 12 months. Modi’s government is also credited with measures such as deregulation of gasoline prices, allowing greater foreign participation in some sectors to spur investment, besides being the first to formally agree on an inflation target with the central bank.
The rupee reversed gains and sovereign bonds declined after Bengali-language newspaper Anandabazar Patrika reported Wednesday that Rajan has told the government that he doesn’t want an extension. The report, which cited unidentified sources close to the central bank chief, also said Modi wants Rajan to continue.
The Indian currency dropped 0.3 percent to 67.4275 a dollar in Mumbai, after rising as much as 0.2 percent earlier on the back of GDP numbers. The yield on notes due January 2026, the currency 10-year benchmark, climbed one basis point to 7.48 percent.
“Rajan’s push for a consumer-price inflation target has hurt the economy,” Subramanian Swamy, the Bharatiya Janata Party member who’s called for Rajan’s ouster, said in an interview last month. Rajan is scheduled to next review monetary policy on June 7.
The topic of reappointment came up repeatedly at a conference in Singapore, where “investors unequivocally wanted Governor Rajan to continue,” according to a Deutsche Bank AG report last month.
While the speculation persists, India’s rupee on Tuesday capped its worst monthly performance since January, sliding 1.4 percent to 67.26 a dollar, as foreign funds exited local bonds amid an emerging-market selloff.
Overseas holdings of government and corporate debt fell by 48.6 billion rupees ($721 million) in May, after climbing for two straight months, National Securities Depository Ltd. show. The Indian currency sank to an all-time low of 68.845 a dollar in August 2013, days before Rajan took over, after the Federal Reserve signaled it would taper monetary stimulus.
While all developing nations are watching the Fed’s rate path, the bigger concern for India “is that Governor Rajan may not get a second term,” said Desmond Soon, Singapore-based head of investment management in Asia outside of Japan at Western Asset, which manages about $450 billion.
“If you have too much of volatility in the rupee, it doesn’t really matter where domestic interest rates are, it’s going to hurt the economy and corporates quite substantially. If they put someone else at the RBI, investors will perceive it negatively.”
Indian sovereign debt returned 8.1 percent last year and 16.5 percent in 2014, the most among major Asian markets. Investing in rupees will earn 12.2 percent, including interest, from now until the end of 2017, according to strategists.
Borrowing in dollars to purchase rupee assets earned 1.9 percent in the past two years, the only positive carry-trade return in Asia apart from the yuan. Indian 10-year bonds offer the highest yield among major regional markets after Indonesia.
“Carry and attractive fundamentals must remain at the forefront of investor thinking,” said Spajic of Pimco. “From a valuation standpoint, India has a lot going for it. We may look to add more.” — Neal Bhai Reports