Indian companies are paying the highest short-term borrowing costs in 19 months as the central bank raises interest rates to contain inflation and investors drain cash for initial public offerings.
Rates for three-month funds almost doubled to 8.25 percent this year as policy makers boosted benchmark interest rates five times to curb price increases that have averaged 9.7 percent. Three-month commercial paper yields for top-rated borrowers jumped 72 basis points, or 0.72 percentage point, this month as investors pulled money from banks to buy stock in Coal India Ltd.’s 152 billion rupee ($3.4 billion) offering, the nation’s biggest-ever initial share sale.
With economists predicting Reserve Bank of India Governor Duvvuri Subbarao will raise the repurchase rate for a sixth time on Nov. 2, costs for companies may continue to increase. Central banks from the U.S. to Japan have cut benchmark borrowing levels to near zero to prop up their economies. Three-month commercial paper rates in the U.S. are 0.31 percent, while borrowers in China are paying 2.8 percent, according to Bloomberg data.
“Funding costs for companies have risen significantly, driven by policy measures aimed at curbing inflation,” Raman Uberoi, Mumbai-based senior director at Crisil Ltd., the Indian unit of Standard & Poor’s, said in an interview yesterday. “Increasing working capital costs would put some pressure on corporate profitability in India.”
Commercial Paper
L&T Finance Ltd., a unit of the nation’s biggest engineering company in Mumbai, sold three-month commercial paper on Oct. 26 at a yield of 8.2 percent, according to data provided by Mumbai-based NVS Brokerage Ltd. Infrastructure Development Finance Co., a state-run lender to power and road projects, sold similar-maturity debt at 7.85 percent the same day, according to data provided by Mata Securities India Pvt. in Mumbai.
Indian lenders borrowed 900 billion rupees from the central bank on Oct. 25, the most since 2008, to replenish cash as companies led by state-owned Coal India raised more since Jan. 1 selling shares than in any previous full year.
Equity offerings in Asia’s second-fastest growing economy after China are poised to drain more money as the government will raise about 400 billion rupees in seven more sales by the end of March, according to an e-mailed note sent Oct. 21 by SMC Global Securities Ltd., the nation’s fourth-biggest brokerage. Earnings for companies in the Bombay Stock Exchange’s Sensitive Index jumped 56 percent this year to 1,028 rupees a share, poised for the biggest annual gain since Bloomberg started compiling the data in 2000.
Foreign Investors
Overseas investors have poured $24.6 billion into Indian equities so far this year, 72 percent more than in the year- earlier period and heading for the biggest-ever annual increase, according to the Securities and Exchange Board of India.
The cost of fixing rates on money for three months surged 273 basis points this year to 6.68 percent in India’s interest- rate swaps market, data compiled by Bloomberg show. Overnight loan rates between banks averaged 6.3 percent this month, up from 3.3 percent in October 2009, as Coal India received bids for 15 times the stock offered.
India’s 10-year bonds rose the most in two months yesterday as yields at their highest level in two years lured investors. The rate on the 7.8 percent note due May 2020 fell five basis points to 8.13 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system.
The rupee slid to 44.4575 per dollar from 44.45 the previous day, and touched 44.635, the lowest since Oct. 12.
The extra yield investors demand to hold India’s top-rated local corporate bonds over government debt has fallen to 59 basis points from 86 at the start of the year.
Bill Yields
India’s three-month Treasury bill yields have risen 323 basis points this year as the Reserve Bank lifted its repo rate by 125 points, data compiled by Bloomberg show. The comparable measure climbed 199 points to 10.69 percent in Brazil and 8 points to 0.13 percent in the U.S. Rates on similar notes from the People’s Bank of China rose 69 points to 2.01 percent.
The government yesterday sold 40 billion rupees of 81-day bills at 6.8536 percent, compared with 6.7706 percent a week earlier. It auctioned 182-day debt at 7.0587 percent, up from 6.8225 percent on Oct. 13.
‘Feeling the Pinch’
The cash shortage at India’s banks may further raise borrowing costs for companies as demand for loans strengthens, according to Mohan Shenoi, the head of Treasury at the Mumbai- based Kotak Mahindra Bank Ltd. The pace of annual growth in bank lending almost doubled in the year ended Oct. 8 to 20.1 percent from the previous 12 months, central bank data show.
“More than the increase in policy rates, the tight liquidity is hurting everyone and industry is feeling the pinch,” Shenoi said in an Oct. 26 interview. “This scale of tightness for a prolonged period could have significant impact on loan pricing.”
Credit-default swaps on State Bank of India rose two basis points yesterday to 163 points, according to data provider CMA. Such swaps usually pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and they rise as perceptions of credit quality deteriorate.
Indian companies have sold 1.59 trillion rupees of bonds this year, up from 1.48 trillion rupees in all of 2009. Local- currency debt sales climbed 42 percent to 14.6 billion real ($8.6 billion) in Brazil, while in Russia they are lagging behind last year’s amount by 18 percent, the data show.
The South Asian nation’s share sales have totaled 1 trillion rupees, beating a previous record of 782 billion rupees set in 2007, data compiled by Bloomberg show.
Ratings Improve
Crisil raised the debt ratings on 253 Indian borrowers in the six months ended Sept. 30, the most since it started business in 1987, the agency said last week. The credit assessor downgraded 111 borrowers. ICRA Ltd., an arm of Moody’s Investors Service, upgraded 99 companies and cut 64, the best ratio since 2005, data compiled by Bloomberg show.
The rate at which banks lend to each other overnight rose to a one-month high of 7 percent this week after a government plan to pump funds into banks by buying back existing bonds achieved less than a quarter of the targeted amount of repurchases. The Finance Ministry bought 25 billion rupees of fixed-income securities at an auction on Oct. 25 after offering to pick up notes worth as much as 120 billion rupees. The auction was the first in a plan to repurchase as much as 285.5 billion rupees of bonds maturing in 2010 and 2011.
‘Bound to Fail’
“The buyback was bound to fail” because banks are already short on cash, Abheek Barua, chief economist in New Delhi at HDFC Bank Ltd., India’s third largest, said in an Oct. 26 interview.
Three-month treasury bills in India now yield a record 651 basis 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.
India’s 10-year government bond yield is the highest among the major emerging economies except Brazil, where similar- maturity notes pay 12.1 percent. Comparable securities offer 3.46 percent in China. U.S. 10-year Treasuries yield 2.70 percent, according to data compiled by Bloomberg.
Higher yields prompted overseas investors to more than double holdings of India’s corporate and government debt in 2010 to a record $17.3 billion on Oct. 25. Accelerated investment inflows helped the rupee strengthen 5.2 percent against the dollar in the past three months, the third-best performance among Asia’s 10-most traded currencies.
“Costs have risen for companies because short-term yields have gone up,” R. Govindan, Mumbai-based treasurer at Larsen & Toubro Ltd., said in an Oct. 26 interview. “If credit growth picks up further, then it will be a problem.”
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