Seeking to support the rupee and boost interest in bonds, India last week announced tax cuts for overseas bond investors and a host of measures aimed at increasing inflows and improving market access.
Foreign inflows into Indian debt have accelerated following these steps, with some fund managers viewing the measures positively, particularly in strengthening India’s case for inclusion in the Bloomberg Global Aggregate Index.
BlackRock, however, has largely stayed out of the Indian market this year, and is not “meaningfully changing strategic exposure yet,” Navin Saigal, BlackRock’s head of global fixed income for Asia Pacific, said.
“The biggest practical overhang for offshore investors in India remains the Middle East trajectory and oil prices.”
While the measures may support inflows at the margin, the world’s largest asset manager, which oversees roughly $14 trillion in assets, cautioned against expecting immediate, one-way flows from long-term investors.
“For many investors, the binding constraint remains the all-in FX hedge cost,” Saigal said, adding the macroeconomic backdrop for India remains challenging with risk of inflation and strain on government finances.
Volatile crude prices widen the range of outcomes for India’s current account, inflation and the rupee, which in turn keeps currency hedging costs high and undermines the total-return profile of Indian bonds, Saigal noted.
For now, BlackRock is focusing on relative-value opportunities rather than taking outright directional bets on Indian rates.
While hopes of a peace deal with Iran have prompted a pullback in oil prices, a protracted conflict and lack of a durable resolution continue to inject uncertainty into oil markets, keeping investors wary of the risks to India’s external balances and currency.
“Greater geopolitical clarity would go a long way toward making investors more comfortable underwriting rupee risk and re-allocating back into Indian bonds at what are increasingly attractive yields,” he said.
On the entry into the Bloomberg index, Saigal said the measures would support India’s case, adding that BlackRock would “almost always favour making markets more accessible,” particularly for large economies whose bond markets are underrepresented in global benchmarks.
