Salivating Bulls Hope the RBI Can Keep India’s Rally Going

(Bloomberg) -- Indian markets have staged an eye-catching comeback in March after taking a drubbing in the first two months of the year, and bulls are salivating at the prospect of more gains.

Foreign investors who shunned rupee bonds and stocks in the wake of border skirmishes with Pakistan have returned as tensions eased, with inflows eclipsing those for closely-watched emerging-market rival Indonesia. Buyers are also emboldened by speculation that the central bank will add to its surprise February rate cut this week and for Prime Minister Narendra Modi's government to win a second term.

The RBI will lower the benchmark repurchase rate by 25 basis points to 6 percent on April 4, according to the median estimate in a Bloomberg News survey. The central bank's dovish turn in February -- when it changed its policy stance to neutral from ‘calibrated tightening' -- spurred the rally in bonds, with investors benefiting from India's relatively high yields. The RBI's open-market debt purchases added to the gains.

Back and How

“The long term case for India is appealing,” said Bryan Carter, London-based head of emerging-markets debt at BNP Paribas Asset Management Ltd. “India has already fired the first easing shot, so expectation is naturally for more.”

The yield on India's most-traded sovereign debt due January 2028 has fallen from this year's high of 7.67 percent in February to 7.48 percent on Friday. That on notes maturing in April 2020 slipped 15 basis points in March to 6.42 percent.

Rupee government and corporate debt lured $2.4 billion last month through March 27, versus $1.4 billion for Indonesia. Indian stocks took in $4.3 billion during the period, contributing to making the equity-sensitive rupee the region's best performer over the past month.

“India benefited because of the shift in RBI's stance and OMO bond purchases as well as the rupee's strength,” said Patrick Wacker, fund manager for emerging-markets fixed income at UOB Asset Management Ltd. in Singapore.

Election Bets

Modi's strong response to the border situation with Pakistan appears to have boosted his popularity. At least four opinion polls conducted in March showed the current ruling coalition led by the Bharatiya Janata Party can either cross or get close to a majority in the 543-seat Indian lower house.

Voting will take place in seven phases between April 11 and May 19. Official results will be out on May 23.

“Capital inflows into India have been driven by higher odds that Modi and BJP will be able to form a government, secure a second term after the elections,” said Roland Mieth, emerging-markets portfolio manager at Pacific Investment Management Co. in Singapore. Indian bonds will continue to attract inflows due to a more dovish Federal Reserve and with the RBI looking to ease policy, he said.

Below are key Asian economic data and events due:

• Monday, April 1: Japan manufacturing PMI and Tankan indexes; manufacturing PMIs in Australia, China, and Malaysia, South Korea trade, Indonesia and Thailand CPI
• Tuesday, April 2: Australia rate decision and budget, India manufacturing PMI, South Korea CPI
• Wednesday, April 3: Japan services PMI and China services PMI, Australia retail sales, trade and services PMI, South Korea and Taiwan foreign reserves, South Korea reserves, Bank of Thailand MPC minutes
• Thursday, April 4: RBI rate decision, South Korea BoP current account, Japan foreign debt activity, Malaysia trade data, India services PMI
• Friday, April 5: Japan household spending, Australia reserves, Philippines CPI and reserves, Malaysia and Thailand reserves

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani

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