Global Funds Dump India Company Bonds As Credit Worries Persist

(Bloomberg) -- Foreign investors' net sales of Indian rupee company bonds rose to the highest in five months, as the slowest economic growth in six years and credit market strains weighed on sentiment.

Overseas funds pulled 26.4 billion rupees ($372.2 million) in October, making it the seventh straight month of outflow and the longest streak since 2016, according to National Securities Depository Ltd. While foreign investors only account for a small share of India's corporate debt purchases, their retreat adds to pressures at a time of record defaults amid a shadow banking crisis.

India's central bank has already cut interest rates five times in a row to spur spending, while the government has taken a series of fiscal steps to boost growth, including a $20 billion cut to corporate taxes. Concerns that the government will borrow more to fund its fiscal deficit, and a sharp jump in credit spreads in October as credit strains deepened, are also making some overseas investors wary.

“Smart money is leaving to take profit and will continue to do so,” said Tongli Han, chief investment officer at Deepblue Global Investment Ltd. A lack of progress in strengthening the nation's banking sector, and better prospects for other emerging market currencies than the rupee, are also reasons, according to Han.

The extra yield demanded by investors to buy top-rated three-year corporate paper over government bonds climbed 26 basis points to 116 last month. That's the biggest increase in a year.

Not all investors are pessimistic. Some signs that the economy may improve have also emerged.

“Even with issues in the banking sector, Indian local bonds have delivered solid returns over the last year,” said Kenneth Akintewe, senior investment manager at Aberdeen. “Valuations remain compelling in better quality issuers.”

Tale of Two Default Waves Scares India Stocks More Than China's

Troubles in India's credit market began last year when major shadow bank IL&FS Group unexpectedly defaulted, prompting broader shock that made it hard for many companies to refinance debt. Altico Capital India Ltd., a realty financier, recently became the latest to default.

To contact the reporter on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Finbarr Flynn

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