By Dharamraj Dhutia
MUMBAI, April 27 (Reuters) - Invesco, one of the world's largest asset managers, considers it too early to expect interest rate hikes by the Reserve Bank of India as a response to risks emanating from the war in the Middle East, and favors investing in Indian bonds with medium-term maturities, according to a senior fund manager at the firm.
Norbert Ling, head of fixed income portfolio management, Asia Pacific, said in an interview on Friday that there is value in the three- to seven-year
segment of India's government bond yield curve.
He suggested that inflation pressures are unlikely to persist and markets may be too pessimistic on the scale of rate hikes, offering an opportunity to fade the sell‑off.
"The belly will be more rate sensitive," Ling said, referring to the belly of the yield curve.
India's 3-year bond yield was at 6.28%, while five-year and seven-year bond yields were at 6.69% and 6.93% on Monday, with yields in all three maturities up by 36-41 basis points since the U.S.-Israeli war with Iran started on February 28.
The same period has seen a 50% surge in crude oil prices, raising concerns about inflation risks in India, which imports most of its supply.
Traders speculate that any sharp uptick in inflation driven by crude oil prices could push the central bank to hike interest rates, when until a few months ago the focus was more on the possibility of rate cuts because of benign local price conditions.
The policy outlook will hinge on the extent of inflation pass‑through from higher fuel prices, the trajectory of crude oil and potential fiscal responses, according to Ling, meaning that it is still too early to bet on rate hikes.
Invesco that manages $2.1 trillion of assets is also constructive underpinned by recent measures taken by India's central bank to support the rupee.
RBI's recent policy actions to curb speculation have reinforced confidence by signaling that currency stability remains a key priority, Ling said.
FOREIGN OUTFLOWS
Foreign investors have turned big net sellers of Indian government debt since the start of the U.S.-Israeli war with Iran, dropping 160 billion rupees ($1.70 billion) of bonds in March-April, according to Clearing Corporation of India.
Ling, however, is not too worried, noting that India has managed its inflation very well.
"The outflow is more of a tactical rotation and not structural pullback from fixed income markets, because before the war foreign investors were positive," Ling said.
India's onshore fixed‑income market continues to matter for foreign investors in search of investment‑grade credit, combining yields of around 7% with a robust growth backdrop, he added.
($1 = 94.1775 Indian rupees)
(Reporting by Dharamraj Dhutia; editing by Nimesh Vora and Ronojoy Mazumdar)
