Rajan move intensifies bond outflow as rupee drops before Brexit

[MUMBAI] India's rupee weakened for a second day after overseas holdings of the nation's debt fell by the most since March.

The currency dropped to a four-week low on Monday following Reserve Bank of India Governor Raghuram Rajan's weekend announcement that he'd leave his post when his term ends in September. Mr Rajan's impending departure has fueled some concern given his success in curbing rupee volatility and controlling inflation. Even so, overseas investors such as HSBC Global Asset Management and Mirae Asset Global Investments Co say India's strong economic fundamentals will ensure local assets continue to lure funds.

Foreign holdings of rupee-denominated government and corporate notes declined 22.6 billion rupees (S$449 million) on Monday, data from the National Securities Depository Ltd. show. They have fallen 125 billion rupees in 2016 after surging 2.2 trillion rupees in the last two years. Anxiety around Britain's referendum on European Union membership has also weighed on emerging markets, with polls suggesting Thursday's vote will be close.

"Rajan is of course key to the fixed-income market and the Brexit event is just around the corner," said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd in Mumbai. "Both of these are causing concern, but we don't expect rupee losses to sustain beyond the initial reaction."

The rupee weakened 0.3 per cent to 67.49 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. The currency has declined 2 per cent this year in Asia's worst performance. Edelweiss recommends buying into the currency, Bameta said.

Investing in rupees will earn 2.5 per cent, including interest, by the end of 2016, the best total return in Asia, according to estimates compiled by Bloomberg. Sovereign bonds were steady Tuesday, with the yield on the current 10-year benchmark notes at 7.50 per cent, according to prices from the central bank's trading system.

"The initial shock will come and go," said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset, which manages US$83 billion worldwide. "Impressive economic growth, improvement in finances, a high carry, subdued current-account deficit and potential for reforms will keep India at the forefront of investors' focus."

BLOOMBERG