Mukherjee Cutting Bond Goal Boosts Demand to Four-Month High: India Credit

India’s combination of reducing targets for debt sales this fiscal year and opening its market to more foreign investment is driving demand at the nation’s bond auctions to a four-month high.

The finance ministry received bids for 2.3 times the 40 billion rupees ($889 million) of 10-year debt on offer at a Sept. 24 sale, the most since May 28, central bank data show. The benchmark 2020 bond may hold its gains even after yields fell almost a quarter-percentage point in the past month as the government cuts borrowing for the first time in four years.

Bond investors are clamoring for India debt as governments in developed economies from the U.K. to Germany step up borrowing in response to faltering growth. Policy makers forecast Asia’s third-biggest economy will grow 8.5 percent, almost four times as much as advanced nations, as Finance Minister Pranab Mukherjee aims to raise 1.46 trillion rupees from sales of state-owned assets and mobile-phone licenses.

“We’ve had many pleasant surprises this year on the fiscal front,” A. Balasubramanian, who oversees the equivalent of $13.6 billion in debt as chief executive officer at Birla Sun Life Asset Management Co. in Mumbai, said in a Sept. 23 telephone interview. “The risk-reward is in favor of investing in government bonds.”

Easing Limits

The nation’s 7.8 percent bond due in May 2020 gained for a sixth day yesterday, the longest winning streak since March, after the government said Sept. 23 it will cut borrowing by 2 percent to 4.47 trillion rupees in the current fiscal year. The same day, the finance ministry doubled the quota for foreigners buying government bonds to $10 billion and raised the limit on corporate debt by 33 percent to $20 billion.

Overseas holdings of India’s corporate and government debt more than doubled in 2010 to a record $17.7 billion as of Sept. 24, according to data provided by the Securities and Exchange Board of India.

The 10-year note yield has slid 21 basis points, or 0.21 percentage point, to 7.86 percent from a four-month high of 8.07 percent on Aug. 25 as the price of the security rose. The yield may drop to 7.5 percent by the end of March, according to Balasubramanian and Ramit Bhasin, the Mumbai-based head of markets in India at Royal Bank of Scotland NV.

If those estimates prove accurate, investors would realize an annualized return of more than 12 percent for the period.

Yield Difference

India’s 10-year bond yield is the highest among major economies except Brazil, where similar-maturity notes pay 11.59 percent. Comparable securities offer 7.62 percent in Russia, 3.32 percent in China and 2.54 percent in the U.S.

The difference in yields between India’s debt due in a decade and 10-year Treasuries was 5.33 percentage points. The measure, which has averaged 3.17 points in the past decade, reached a two-year high of 5.56 points on Aug. 26.

Mukherjee aims to narrow the budget deficit to 5.5 percent of gross domestic product in the year ending March 31, from a 16-year high of 6.9 percent in fiscal 2010. The federal government plans to sell 110 billion rupees of bonds on Oct. 1, part of a plan to raise 1.63 trillion rupees in the second half.

“The fiscal story is positive so far because tax collections have been better than it was last year, probably well in line with the target,” helping the government pare its borrowings, said Rajeev Radhakrishnan, a Mumbai-based money manager at SBI Funds Management Pvt. The firm is a unit of the nation’s biggest bank, with $4.9 billion assets in debt.

Taxes collected from companies are poised to rise 18 percent to 3 trillion rupees this year, budget estimates show.

Inflation, Rates

The benchmark yield is unlikely to drop below 7.75 percent by the end of March as inflation near 10 percent prompts the central bank to raise interest rates by a further 50 basis points, following a 125 basis-point increase in the repurchase rate since March 19, said Manoj Swain, chief executive officer of Morgan Stanley India Primary Dealer in Mumbai.

Inflation as measured by wholesale prices held above 10 percent for four months since March before slowing to 8.5 percent in August, according to commerce ministry data.

“Monetary aspects are negative,” Swain said in a telephone interview yesterday. “There’s hardly any room for a rally in a big way, though demand would also be better than earlier” after the government raised the limit for foreigners, Swain said.

Debt Returns

The fixed average coupon that India pays on its 20.324 trillion of government bonds outstanding with a weighted average maturity of 10 years is 7.85 percent, according to data compiled by Bloomberg. The rate was 7.89 percent in the year ended March 2010, according to the central bank’s annual report.

India’s government securities returned 3.6 percent this year, the second-worst among 10 local-currency debt markets outside Japan, according to indexes compiled by London-based HSBC Holdings Plc, Europe’s largest bank.

Asia’s third-biggest economy expanded 8.8 percent last quarter from a year earlier, the best since 2007 and the fastest pace among major economies excluding China. It is set for a 9.4 percent gain in 2010, outpacing 2.6 percent growth in advanced countries, the International Monetary Fund forecast in July.

India’s economic outlook led Moody’s Investors Service to raise the nation’s local-currency rating on July 26 by one level to Ba1, the highest non-investment grade, and affirm the nation’s foreign-currency debt rating of Baa3. Standard & Poor’s and Fitch Ratings rate India’s local-currency debt BBB-, the lowest investment grade.

License Fees

Accelerated investment inflows helped the rupee strengthen 4.6 percent against the dollar this month, the best performance among Asia’s 10-most traded currencies. The currency traded at 45.015 per dollar yesterday.

Phone companies, including Reliance Communications Ltd., Vodafone Group Plc’s Indian unit, and Bharti Airtel Ltd., paid the government 677.2 billion rupees this year for permits of mobile-phone licenses. Indian companies also spent 385.4 billion rupees to buy wireless-broadband Internet licenses in an auction held in June.

Policy makers want to raise 400 billion rupees by selling shares in state-owned companies in the year ending March 2011. The government plans to divest 10 percent in Indian Oil Corp., the nation’s second-biggest refiner, and 5 percent in Oil and Natural Gas Corp., its biggest explorer, Secretary S. Sundareshan, the top bureaucrat in the oil ministry, told reporters in New Delhi on Sept. 6.

The revenue, should the government meet its goals, “would be a huge positive on the fiscal side, which will open up the possibility of some more reduction in borrowing,” said SBI Funds Management’s Radhakrishnan.