With overseas investor limits for India’s high-yielding sovereign debt almost used up, bond funds are starting to buy up state notes. Problem is, finding decent data on the local economies. Aberdeen Standard Investments started buying the securities about three months ago and they now account for about a fifth of its $312mn Indian bond fund, said Lin Jing Leong, a fixed-income investment manager in Singapore. Finding timely figures on the states, even ones like Maharashtra, of which Mumbai is the capital, is challenging, she said.“Maharashtra was one of the hardest states to look at in terms of bottom-up economic analysis,” Lin said in an interview. “It was even difficult finding a document with numbers on the most recent budget. Last year’s GDP growth numbers are still not out for some of the states.” The highest yields among major Asian emerging markets have made Indian government debt a favourite with overseas investors, who have pumped about $20bn into rupee securities this year.
State bonds, which offer an extra 60-70 basis points of yield over the sovereigns, trade at very similar levels despite differences between the local economies. That’s because the Reserve Bank of India has a 0% risk rating on the notes, meaning domestic investors treat the unrated securities like federal debt. Foreigners are a bit more wary. The lack of differentiation in spreads means Nomura Asset Management favours debt from states with the stronger finances, said Simon Tan, a fund manager in Singapore, who oversees Nomura’s Indian bond fund. He declined to name the states he likes. While Tan started buying the debt in 2015, it still makes up less than 1% of the fund’s $1.75bn of assets.
“We’d like to increase our exposure but are unlikely to until the liquidity situation improves,” Tan said in an interview. Is a solution at hand? The Reserve Bank in its October policy document said it would release high-frequency data on state finances available with it, and hold state bond auctions on a weekly basis. Improving liquidity by reselling debt and buybacks is also on the cards. Inadequate data apart, large supply of state debt is also a concern as local governments need funds for higher pay for their staff and farm loan waivers. Net borrowing by states is estimated to rise to Rs3.8tn ($58bn) in the year to March, up 12% from the previous year, said Nagaraj Kulkarni, senior Asia rates strategist at Standard Chartered in Singapore.
States are due to sell up to Rs1.3tn of bonds in the December quarter, as per RBI.
Overseas funds had used up 14% of their state bond quota as Monday, versus almost 100% of the sovereign limit, data from NSDL show. In the long-term investor category none of the state quota has been filled, while 79% has for central government notes. Aviva Investors isn’t in the state bond market yet, but is looking at it closely, said Stuart Ritson, the Singapore-based head of Asian FX and rates. “Foreign involvement in the market is picking up from a very low base,” he said in an interview. “That for us is quite an interesting opportunity.”
At Fidelity International, Bryan Collins, a Hong Kong-based fund manager, is hopeful that the launch of a new national sales tax in July will make state finances more transparent. He said he will probably participate as the market develops. Aberdeen’s Lin said she chose to invest in bonds of six states – Chhattisgarh, Karnataka, Gujarat, Tamil Nadu, Andhra Pradesh and Maharashtra – that offer a mix of good financial profiles and liquidity. Economic fundamentals and debt-to-GDP ratios of some of these states are better than India as a whole, she said. While liquidity is a concern, Aberdeen has had some success in getting local brokers to connect it with potential onshore buyers, Lin said. “We were one of the early asset managers to get into Indian state bonds,” she said. “We’re definitely seeing others try and get on board. We’re all commiserating with each other at conferences about how hard it is to get data.”