We have scheduled a syndication of Inter-America Development Bank (IDB) Bonds targeting a yield of 5.65% denominated in Indian Rupees that mature January 2014.
Corporate Bond linked to Indian Rupee
The Inter-American Development Bank offering are bonds denominated in the Indian Rupee with a projected yield of 5.65 % for 31 months. While the US dollar remains the dominant currency in the global economy, its role as the world’s reserve currency has been called into question since the recent financial crisis. It is the World Bank’s view (among others) that the decision of the Federal Reserve to adopt “very loose monetary policy and the depreciation of the dollar may be having impacts on global confidence in the dollar as the international reserve currency, which could have important consequences.” An example of the diminishing role of the US dollar is seen in the realization that India is already paying for oil in Rupees. This bond provides diversification to a country with one of the fastest growing major economic and increasingly significant monetary systems that we could identify.
US Debt Woes
The US federal deficit now stands at $14.269 trillion, a mere 25 million shy of the current debt limit, as U.S. Treasury Secretary Timothy Geithner reiterates to lawmakers today that “the debt limit must be increased.” During the past decade, Congress has raised the debt limit 10 times, on average once a year. During the past 50 years, the country has reached the debt ceiling 74 times. Never once during those episodes has the United States defaulted on interest payments on the national debt nor has it had to suspend or reduce Social Security payments, although the prospect of both calamities occurring is always used to scare the American public into supporting an unconditional increase in the debt limit fairly quickly after the debt ceiling is reached. The debt limit has not achieved its original purpose of limiting government spending, which rose from 9.5 percent of gross domestic product in 1917 to 18.2 percent in 2000 to 24.1 percent this year. Nor has it held the national debt in check. From a recent low of 56.6 percent of GDP in 2000, the national debt rose to 93.3 percent last year. With Fiscal and monetary policies remaining in poor condition, investors continue to worry about the long decline of the US Dollar against other world currencies and the resulting reduction in purchasing power. Fixed income investors are having a difficult time finding good yields. The Ten Year Treasury of 3.12% appears quite low for a ten year investment, especially considering the consumer price index (CPI) in April rose 3.2% over the last 12 months, the biggest yearly jump since October 2008. That’s up from a yearly jump of 2.7% in March and 2.1% in February. Here at Durig Capital, we excel at finding much higher yields with far shorter maturities, trying to protect our clients assets from the possible continued devaluing of the dollar by moving them into currencies that are much more conservative in their debt than the US.
Economic liberalization in India, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country’s growth, which has averaged more than 7% per year since 1997. Capitalizing on its large educated English-speaking population, India has become a major exporter of information technology services and software workers. In 2010, the Indian economy rebounded robustly from the global financial crisis – in large part because of strong domestic demand – and growth exceeded 8% year-on-year in real terms. An industrial expansion and high food prices, resulting from the combined effects of the weak 2009 monsoon and inefficiencies in the government’s food distribution system, fueled inflation which peaked at about 11% in the first half of 2010, but has gradually decreased to single digits following a series of central bank interest rate hikes. India’s annual inflation rate for all commodities, based on the new series of WPI (Wholesale Price Index), for April eased to 8.66 per cent. The Indian Government seeks to reduce its budget deficit to 5.5% of GDP in FY 2010-11, down from 6.8% in the previous fiscal year. According to a recent Sovereign Fiscal Responsibility Index established by the Stanford Institute for Economic Policy and Research, India’s 12th place ranking places it significantly ahead of the 28th place assigned to United States.
The Inter-America Development Bank (IDB)
The IDB, established in 1959, is an supernational financial institution that is the largest source of development financing for Latin America and the Caribbean. It uses the resources it raises in capital markets to support programs that promote development and economic growth while respecting and protecting the environment. Although most of IDB’s loans finance public sector projects, a significant portion of its operations are directed toward promoting development through the private sector. Current key initiatives for the progress of its borrowing member countries include the modernization of infrastructure, development of alternative energy sources, and universal access to clean water and sanitation. The financial and operational aspects of IDB-financed projects are subject to internal inspection and external audits in order to guarantee the appropriate use of resources, and to ensure that executing agencies and contractors meet their contractual obligations. The Bank’s financial strength also comes from its preferred (triple-A) creditor status and its conservative risk and financial management. While the majority of IDB staff is located in Washington, D.C., the Bank is implementing a decentralization effort aimed at placing more specialists on the ground in order to facilitate closer cooperation with clients, countries, and partners. When the process concludes, approximately half of all staff will be stationed in the borrowing countries. These reforms will allow for a leaner, more effective institution.
The default risk is Inter-America Development Bank’s ability to perform. This India bond has no rating assigned to it, though IBD has been a triple-A issuer since 1962. It is therefore our opinion that the default risk is less than the currency risk of the Rupee.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Indian economy.
With India’s high economic growth rate and over 15% of the world’s population, India is a significant consumer of energy resources. While the Indian government continues to promote exploration activities and boost domestic oil production, it is estimated that nearly 30% of India’s total energy needs are met through imports. It may also be noted here that the country has 20 nuclear plants in operation, with an additional 23 on order. India’s long term challenges include widespread poverty, inadequate physical and social infrastructure, limited non-agricultural employment opportunities, insufficient access to quality basic and higher education, and accommodating rural-to-urban migration.
Many people may ask, how do I invest in Indian Rupee Bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint, at Durig Capital we often combine world bond buyers into a larger institutional sized purchase. In our previous syndicates, we were able to facilitate purchases as low as $10,000 US Dollar and should be able to do the same for your interest. So the answer to the question how do I invest in India is simple – contact your Durig professional.
Despite pressing problems such as significant overpopulation, environmental degradation, extensive poverty, and widespread corruption, rapid economic development is fueling India’s rise on the world stage. With the youngest and second largest workforce in the world, India’s remarkably high growth rate is likely to continue for many years to come. IDB bonds denominated in the Indian Rupee offer an attractive yield (5.65%) for a reasonably short duration. The combination of providing our clients higher yield plus protecting our clients against possible dollar declines offers a sound reason for diversifying away from an overburdened currency debt structure like the US and into one of the World’s fastest growing economies, and it is why are currently adding this India based Rupee denominated bond to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients currently own these Development bonds.
To know more about this Investment call our specialist at 971-327-8847