Weak Rupee Prompting Global Funds to Dump India Bonds

(Bloomberg) -- India needs all the help it can get as it tries to develop its small corporate bond market to overcome a cash crunch that's hobbled economic growth.

Weakness in the rupee, though, is making that harder. Foreign investors spooked by the currency's slide sold 74 billion rupees ($1.03 billion) of local notes more than they bought this month, the most since April, dragging their holdings down to a 2.5-year low of 1.9 trillion rupees.

Cash-strapped businesses struggling to get financing amid a shadow banking crisis would no doubt like to see foreigners taking out their checkbooks more -- global investors make up only a small proportion of overall local corporate bond holdings. But rising defaults, a slowing economy and a sovereign outlook downgrade by Moody's Investors Service have given global funds further pause.

The rupee is the worst performer among emerging market peers in Asia this half. That's crimped flows from offshore into corporate bonds.

Foreign Flows

It's a different picture for the nation's stock market as investors expect to profit more from recent corporate tax cuts. Foreigners were net buyers of $3 billion of Indian equities this month, headed for the highest since March.

Prime Minister Narendra Modi's steps to revive economic growth aren't assuring many corporate debt investors. Data on Friday showed growth slowed to 4.5% in the July-September quarter from a year ago, the weakest since 2013, and down from 5% in the previous quarter.

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Moody's and S&P Global Ratings have flagged risks that the troubled shadow lending sector will worsen a prolonged credit squeeze.

Still, some yield-starved international fund managers are bargain hunting for Indian corporate debt -- it's just that they're going for dollar bonds, which preclude the need for currency hedges. That's helped issuance of foreign-currency securities by Indian borrowers reach a record in 2019.

--With assistance from Lianting Tu and Kartik Goyal.

To contact the reporter on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Denise Wee, Ravil Shirodkar

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