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A Huge Gap in Returns Is Opening Up in India’s Credit Market

Divya Patil

(Bloomberg) -- India’s credit crisis has come with a silver lining for some of the country’s funds investing in top-rated corporate bonds.

Returns have jumped after the central bank delivered a string of rate cuts in part to fight the crisis. The broader credit market woes have also helped indirectly by burnishing the appeal of higher-rated debt, even as lower-rated credits have struggled.

“The rate-easing cycle is on and liquidity is expected to stay surplus,” said Lakshmi Iyer, chief investment officer for fixed income at Kotak Mahindra Asset Management Co.

Average returns have jumped to the highest in three years on funds holding company notes rated AA+ and above overseen by the top 10 asset management companies.

The Reserve Bank of India this year has delivered five back-to-back rate cuts. The gains may extend as the RBI is expected to further ease policy amid continued weakness in the economy, fund managers say.

The spread between three-year, top-rated company and sovereign debt narrowed 55 basis points so far this year, thanks to Asia’s most aggressive easing cycle. That compares with a widening of 35 basis points in the year-earlier period.

The risk aversion generated by the collapse of the shadow lending giant IL&FS Group last year has seen assets of funds that invest mainly in AAA or AA rated debt jump to 740 billion rupees ($10.3 billion) in October from 610 billion rupees in April, data from the Association of Mutual Funds in India show.

In comparison, the pool of money managed by funds holding higher risk debt securities has shrunk by about a fifth to 210 billion rupees during the period, the data show.

(Updates bonds spread in sixth paragraph.)

To contact the reporter on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ravil Shirodkar

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