Bond yields of emerging markets have jumped by 150 basis points on the back of a huge sell-off from foreign investors. But they continue to pour money into Indian debt
The last few weeks have witnessed one of the worst sell-offs in emerging market debt since the financial crisis of 2008, foreigners dumped emerging market debt for a variety of reasons. But in an interesting case of decoupling, foreigners continued to pour money into the Indian debt market.
As oil prices tumbled, debt of emerging market countries, whose economies and finances are most dependent on oil exports, began underperforming. Crude oil dropped 48% since June, to about $55 a barrel, squeezing exporters from Venezuela to Russia and Nigeria. Venezuelan sovereign US dollar debt fell by more than 10% in November, pushing yields to over 20%. Russia’s U.S. dollar debt was down 2.6%. Ukraine’s government bonds slid 10% in November. However, there has been no impact on Indian debt and foreign investors were net buyers. In fact, thank to rapidly declining inflation, yields too have dropped significantly from the highs seen last year.
To control attract inflow and stem the outflows, the Central Bank of Brazil raised the benchmark interest rate by half a point to 11.75% on December 3 amid high inflation, low economic growth and a falling currency. Central Bank of Russia hiked its benchmark one-week repo rate from 10.5% to 17%, effective December 16.
In fact, the yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012. A few analysts suspect some signs of trouble in certain emerging markets.
The EM bond market has also been under selling pressure based on the stand taken by the US Federal Reserve, that they may increase rates sooner than expected, even though they stressed patience. The Fed is possibly laying the ground for its first interest rate increase since 2006, threatening to reverse the capital inflows into developing nations.
Foreigners had panicked about a rate hike and its impact on emerging markets in the middle of 2013, when over two months they had sold off Rs44,000 crore of Indian debt. But once the government appointed Raghuram Rajan as the RBI governor and the rupee stabilised, they have been net buyers all through.
India seems to be immune from such worries of a rate hike this time. In fact, with easing inflation, the Reserve Bank is expected to cut interest rates from the prevailing 8%. Foreign investors purchased nearly Rs1.53 lakh crore of Indian debt over the past one year. Indian mutual funds, over the same period have purchased Rs6.21 lakh crore of Indian debt.
The Indian 10-year benchmark yield which was trading above 9% in April 2014, is now trading a little over a 100 basis point lower at around 7.93%.