Investors Fleeing Bonds Spur Record Gold Inflows: India Credit

India investors have been withdrawing from government bonds and national-savings schemes in order to pour their money into gold. Investors are switching assets, and more have been going towards gold in an effort to protect their wealth against economic uncertainty.

November 11, 2011, 6:03 AM EST
By Tushar Dhara and Swansy Afonso
Business Week

Nov. 11 (Bloomberg) -- Investors in India are withdrawing from government bonds and national-savings schemes to pour record amounts into gold.

Funds that invest in sovereign debt shrank 4 percent from a month earlier to 30.2 billion rupees ($606 million) in September and those that buy gold rose 8 percent to an all-time high of 81.73 billion rupees, according to the Association of Mutual Funds in India that is also known as AMFI. Individual investors withdrew 78.7 billion rupees between April and September from small-savings deposit plans such as those run by post offices, the most since at least 2000, government data show.

Benchmark bond yields in Asia’s third-biggest economy are headed for the biggest annual increase since 2009 as investors seek shelter from inflation that has held above 9 percent since December. The yield on the nation’s 10-year notes is 76 basis points below the rate of inflation, compared with 14 basis points in South Korea. Indonesia’s bonds yield 179 basis points more than the rate of consumer-price increases.

“There is asset-switching, and people are betting more on gold as it is a safer asset and offers a hedge against India’s high inflation and the economic uncertainty affecting the world,” Debasish Mallick, the Mumbai-based chief executive officer at IDBI Asset Management Ltd. that oversees about $1 billion, said in an interview on Nov. 9. “Investing in gold is a very prudent asset-allocation strategy.”

IDBI Asset’s first gold mutual fund, which collected 1.1 billion rupees from 12,000 individual investors, will start trading on Nov. 17.

Deposit Rates

Funds that invest in gold have more than doubled from 35.2 billion rupees at the end of last year, while those that buy sovereign debt have shrunk 26 percent from 41 billion rupees, AMFI data show. Individual investors withdrew money from state- run savings plans, which the government can tap directly, for a third straight month in September. The plans offer a return of 8 percent, while State Bank of India, the nation’s biggest lender, pays 9.25 percent on one-year deposits, its website shows.

That still trails price increases in the world’s second- most populous nation. The wholesale price index rose 9.72 percent in September from a year earlier after climbing 9.78 percent in August, official data show.

“Inflation is running ahead of bank deposit rates,” Ritesh Jain, the Mumbai-based head of investment at Canara Robeco Asset Management Ltd. that oversees about $1.75 billion, said in an interview on Nov. 9. “People are seeing the value of their money eroding. There is still enough juice in gold to continue to attract investment.”

Bank Holdings

The yield on the government’s 8.79 percent bonds due November 2021 rose five basis points, or 0.05 percentage point, to 8.96 percent today from Nov. 9, according to the central bank’s trading system. India’s financial markets were closed yesterday for a public holiday.

The rate on notes due in a decade has climbed 104 basis points this year. The yield rose 233 basis points in 2009 following the global financial crisis that was spurred by the collapse of Lehman Brothers Holdings Inc. India’s banks, the biggest buyers of government securities, sold 195.3 billion rupees more local-currency notes than they bought in September, the most since October 2010, according to central bank data.

Global investors are also seeking higher premiums to hold Indian debt. The difference in yields between 10-year sovereign rupee bonds and similar-maturity U.S. Treasuries widened to a record 697 basis points on Nov. 9. Rupee-denominated notes returned 1.9 percent this year, the worst performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.

Average Forecast

The rupee fell 0.1 percent today to 50.22 per dollar. It has slumped 10.9 percent this year, the worst performance among Asia’s 10 most-traded currencies.

Gold for immediate delivery traded at $1,766 an ounce yesterday. Bullion prices will climb 15 percent more to a record $2,038 an ounce by the end of the year, according to the average estimate of 16 respondents in a Bloomberg survey conducted at a London Bullion Market Association conference in Montreal in September.

India’s combined imports of gold and silver rose 40 percent in October to $7.2 billion from a year earlier, Trade Secretary Rahul Khullar told reporters in New Delhi on Nov. 8, attributing the increase to “asset switching.”

‘Not So Bullish’

Demand for gold in the South Asian nation may rise to a record for a second straight year, David Lamb, the managing director of the jewelry and marketing unit at the World Gold Council, said at a conference in New York on Oct. 26. Consumption rose to a record 963.1 metric tons last year, driving imports to an all-time high of 958 tons, according to the council.

Higher gold prices may damp demand, according to the Bombay Bullion Association. The nation will import 900 metric tons this year, 6 percent less than in 2010, Prithviraj Kothari, president of the association, said in an interview yesterday.

“I am not so bullish on gold,” Kunal Shah, head of commodity research at Mumbai-based brokerage Nirmal Bang Commodities Pvt., said in an interview on Nov. 9. “A growth slowdown in the developed world and inflation concerns in emerging markets will drag down commodity prices, including gold.”

Haven Demand

The cost of insuring the debt of State Bank of India against default using credit-default swaps has risen this month. Five-year swaps on the lender, viewed as a proxy for the nation, cost 308 basis points yesterday from 266 basis points at the end of last month, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a company fails to adhere to its debt agreements.

Europe’s debt crisis will spur demand for gold, according to San Mateo, California-based fund ASA Ltd., which invests in mining companies. The value of bullion held by the Reserve Bank of India has climbed 27 percent this year to $28.7 billion, more than the 24 percent increase in gold prices, suggesting that the monetary authority is boosting its reserves of the metal.

“The list of problems in Europe is growing faster than the possible solutions,” David Christensen, who oversees $650 million as chief executive officer at ASA, said in an interview in New York on Nov. 9. “That’s adding more fuel toward gold being added as a safe haven. Institutional investors and central banks are all adding gold to their portfolios.”

Tasneem Lokhandwala, a 27-year-old freelance assistant director of movies in Mumbai, says she moved money out of bank deposits into gold funds after bullion prices fell 11 percent in September.

“Gold rates keep rising no matter what, and the return is higher than what the banks offer,” Lokhandwala said in an interview on Nov. 9. “Gold is mostly a way of collecting for marriage.”

--Editors: Ven Ram, Sandy Hendry

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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