Oil’s descent into a bear market has once again burnished the appeal of assets in nations running current-account deficits. Indonesian bonds, seen by some as a bellwether for sentiment toward developing markets, have set a blistering pace over the past month, gaining almost 8 percent.
Indian sovereign bonds rallied on Wednesday as oil showed little sign of recovering from its unprecedented decline. The 10-year yield dropped five basis points to 7.71 percent to head for its lowest close since Aug. 1. The rupee -- Asia’s worst-performing currency in 2018 -- surged to an almost two-month high as crude’s slump eased concern over India’s current-account deficit.
Earlier in the year, elevated energy prices, fears of fiscal slippage and the rupee’s plunge helped drive a yearlong rout in Indian bonds, with foreign holdings falling by as much as 330 billion rupees around mid-June from end-2017 levels.
“If oil continues to fall, we can expect it to be supportive of Indian government bonds as oil is arguably the major swing factor in terms of impact to economic growth and how it weighs on sentiment for India,” said Thomas Wu, head of Asia fixed income for discretionary portfolio management at Pictet Wealth Management in Hong Kong.
India’s consumer price inflation -- already below the central bank’s 4 percent mandate -- is set to slow further, which may prompt the Reserve Bank of India to switch back to a neutral policy stance, according to Abhishek Gupta, an economist with Bloomberg Economics in Mumbai. If Brent remains below $70 a barrel, a rate cut by February or April 2019 can’t be ruled out, he wrote.
Oil has slipped from a four-year high reached in early October. Saudi Arabia’s decision to lower exports by 500,000 barrels a day may avert a collapse in prices, but it may not be enough to stoke a rally, Kunal Agrawal, a Bloomberg Intelligence analyst, wrote in a note.
Still, the turn in sentiment isn’t prompting overseas investors to buy aggressively just yet as Prime Minister Narendra Modi’s government faces state elections over the next few weeks and a national ballot is due middle of 2019.
“While local currency India bonds remain a good diversification strategy versus other net oil-exporting EM countries, I’m cautious with the upcoming state and general elections,” said Lin Jing Leong, an investment manager at Aberdeen Standard Investments, which oversees about $384 billion in assets. “Many election results globally have surprised us over the last two years,” Leong said, adding that she prefers shorter-duration local government debt.