India’s money market rates at a two-year high are making the shortest-term debt investments more popular than stocks, bonds and gold amid a cash crunch at banks.
The yield on one-year treasury bills rose to 6.55 percent on Sept. 24, about the highest level since December 2008 and 26 times the rate on similar-maturity U.S. Treasuries, data compiled by Bloomberg show. Short-term debt funds took in 532 billion rupees ($11.8 billion) in the first eight months of the year, or 75 percent of the amount asset managers raised, according to the Association of Mutual Funds in India.
India’s bills pay the most in Asia except Vietnam as central bank Governor Duvvuri Subbarao cuts money-supply growth to the slowest rate since 2005 to fight inflation. While policy makers in the U.S. and Japan are injecting cash into economies where rates are already near zero, the Reserve Bank of India has raised borrowing costs five times this year, more than any other monetary authority in the region.
“Short-term debt yields look quite attractive,” Navneet Munot, who oversees $8.5 billion as chief investment officer at Mumbai-based SBI Funds Management Pvt., a unit of the nation’s largest lender, said in a Sept. 23 phone interview. “Yields are now at a peak because the worst of inflation is behind us.”
Bills Versus Bonds
Rates on one-year government debt in India have jumped 1.97 percentage points this year, heading for a record annual surge and dwarfing the 28 basis-point increase in the yield on 10-year debt to 7.87 percent, data compiled by Bloomberg show. The difference, or yield curve, narrowed to 1.32 percentage points from a record 3.44 percentage points in December 2009.
India’s treasury bills returned an annualized 3.6 percent since Dec. 31, beating the 3.2 percent for bonds, Bloomberg calculations based on indexes compiled by the National Stock Exchange of India Ltd. and Bank of America Merrill Lynch show. Gains in the benchmark Sensitive Index of the nation’s shares slowed to 15 percent this year from 74 percent in the year- earlier period. Gold has advanced 18 percent in 2010.
Indians added 254 billion rupees to bond funds and pulled out 76 billion rupees from equities in the eight months through August, according to data from the Association of Mutual Funds.
The government and banks are paying higher rates for short- term borrowing because the central bank is restricting funds as demand for credit increases. Bank notes, or certificates of deposit, due in a year offer 8.07 percent, exceeding 10-year bond yields across Asia excluding Pakistan. Comparable company debt has a rate of 8.43 percent, Bloomberg data show.
Money Supply, Rates
Annual growth in bank lending accelerated to 20 percent in August from a 12-year low of 9.5 percent in October 2009, according to central bank data.
Yearly expansion in money supply slowed to 15 percent this month from 20 percent a year earlier as Subbarao raised the benchmark reverse repurchase rate by 1.75 percentage points this year to 5 percent, Reserve Bank data show. The measure is set for the biggest annual increase since it was introduced in 2000.
The central bank will boost rates at least 50 basis points more in the year ending March 31, ING Investment Management Pvt., an Indian venture of the biggest Dutch financial-services company, forecasts.
Rising borrowing costs have helped lower the nation’s inflation rate, measured by wholesale prices, to 8.5 percent in August from a 20-month high of 11 percent in April. The central bank estimates the pace of price gains, still the fastest in Asia except Pakistan, will slow to 6 percent by March.
ING Forecast
“We’ll see more inflows into short-term debt funds as the RBI continues to keep liquidity tight,” K. Ramanathan, who helps manage the equivalent of $316 million in Mumbai at ING Investment, said in an interview on Sept. 18. “As the central bank raises interest rates, money-market rates will climb.”
The difference between India’s one- and 10-year bond yields will shrink to 1 percentage point as the shorter-term rate increases faster, he said, without specifying a time frame.
India’s reverse repo rate of 5 percent is the highest in Asia excluding Indonesia and compares with benchmark rates of zero to 0.25 percent in the U.S., 7.75 percent in Russia and 10.75 percent in Brazil. Asia’s third-biggest economy grew 8.8 percent last quarter from a year earlier, the most since 2007.
The Reserve Bank’s decision on whether to raise rates further will depend on the pace of price increases as borrowing costs are near their “neutral” level, Governor Subbarao said on Sept. 20 in the southern city of Hyderabad.
Cash at Banks
Cash at India’s banks declined in the year that began April as the government pursued a $99 billion borrowing program and companies paid $23 billion in license fees for wireless-phone services. The rate at which banks lend to one another overnight rose to as high as 6.4 percent on Sept. 22 from 3.3 percent at the start of the year, data compiled by Bloomberg show.
Investors may benefit from the surge in money-market rates by agreeing to receive fixed one-year rates in exchange for variable payments in a so-called interest-rate swap, according to Credit Agricole Corporate and Investment Bank, a unit of France’s second-biggest bank. The one-year swap rate, which has gained 1.38 percentage points this year, was at 6.45 percent on Sept. 24, according to data compiled by Bloomberg.
“We believe that the market is overestimating the hawkish bias of the Reserve Bank and underestimating the potential for improvement in liquidity in the second half of 2011,” Darius Kowalczyk and Frances Cheung, Hong Kong-based strategists at Credit Agricole CIB, wrote in a research note on Sept. 22.
Relative Yields
India’s 10-year bond yield is the highest among major economies except Brazil, where similar-maturity notes pay 11.96 percent. Comparable securities offer 7.62 percent in Russia and 3.23 percent in China and 2.57 percent in the U.S., according to data compiled by Bloomberg.
The difference in yields between India’s debt due in a decade and 10-year Treasuries was 5.26 percentage points on Sept. 24, little changed from a week earlier. The measure, which has averaged 3.18 points in the past decade, reached a two-year high of 5.56 points on Aug. 26.
One-year bills now yield 6.26 percentage points more than the three-month dollar London interbank offered rate, a measure of funding costs for global investors that is currently 0.29 percent, Bloomberg data show. The spread is about the widest since September 2008.
Foreign holdings of India’s corporate and government debt more than doubled in 2010 to a record $17.4 billion on Sept. 23 as yields climbed. Accelerated investment inflows helped the rupee strengthen 4 percent against the dollar this month, the best performance among Asia’s 10-most traded currencies.
“The strong capital inflows will help ease the cash crunch in the coming months,” SBI Funds’ Munot said. “That will boost short-term debt prices, and investors who already own them will gain.”
Indian banks’ loans rose 315 billion rupees in the two weeks ended Sept. 10, raising outstanding advances to 33.8 trillion rupees, central bank data showed Sept. 24. Loans to industry and consumers rose 277 billion rupees during the period, while food credit rose 38.3 billion rupees. Credit rose 19.8 percent, or by 5.58 trillion rupees, in the 12 months through Sept. 10.
Subscribe to:
Post Comments (Atom)
Posts
No comments:
Post a Comment