Gujarat Yields Retreat From Nine-Year High as RBI Pumps Cash: India Credit

Indian state debt yields are showing signs of peaking after the central bank signaled it would freeze borrowing costs in the world’s second-fastest growing major economy.

Gujarat sold bonds due in 10 years at 8.42 percent on Nov. 9, down from a nine-year high of 8.51 percent at an Oct. 26 sale, Reserve Bank of India data show. That was the biggest decline since May for the state, home to the world’s biggest oil refinery. Yields for Punjab, India’s second-biggest producer of food grains, fell 4 basis points to 8.44 percent.

Capping debt costs for Gujarat and Punjab will help fund highways, ports and schools in an economy forecast by the International Monetary Fund to expand 9.7 percent this year, almost four times the pace predicted for the U.S. Central bank Governor Duvvuri Subbarao said last week interest rates may remain unchanged after six increases this year, prompting Nomura Holdings Inc. and Barclays Plc to say policy makers will hold borrowing costs in check until at least April.

“Rates are peaking, and yields at this week’s state debt auction support that outlook,” Pradeep Madhav, managing director at Securities Trading Corp. of India, a Mumbai-based primary dealer partly owned by State Bank of India, said in an interview yesterday. “The pressure on policy makers to increase borrowing costs is going away as inflation eases.”

Raising Rates

Subbarao last raised the benchmark repurchase rate on Nov. 2 by 0.25 percentage point to 6.25 percent. Higher borrowing costs slowed increases in the nation’s consumer prices, the fastest in Asia except Pakistan, to 9.8 percent from a record 16.2 percent in January, government data show.

States have issued $14.5 billion of debt since April, 20 percent of the amount the federal government borrowed.

Borrowing costs for the western state of Gujarat, whose economy grew 10.5 percent in the year ended March 31, climbed in all but two of the seven debt auctions this fiscal year that began in April. Reliance Industries Ltd., India’s biggest company by market value, runs a 1.24 million barrel-a-day refining operating at Jamnagar in the state.

The northern state of Punjab raised 37 billion rupees ($835 million) since April by selling 10-year debt.

Five Indian states sold a combined 36.5 billion rupees of notes due in 2020 on Nov. 9. Along with Gujarat and Punjab, the southern states of Karnataka, Kerala and Puducherry issued debt at yields of 8.42 percent, 8.43 percent and 8.41 percent.

Cash Crunch

State debt yields eased as Subbarao extended measures to alleviate the nation’s worst cash crunch on record.

Banks, the biggest buyers of government debt, have depended on the central bank for daily funds since Sept. 9. They borrowed nearly 1.2 trillion rupees every day this week, compared with an average 629 billion rupees last week, Bloomberg data show.

The Reserve Bank said Nov. 9 it will hold additional daily money-market auctions up to Dec. 16 to inject funds into banks. It also allowed lenders to raise cash by temporarily lowering bond holdings below a regulatory limit. Local banks are required by law to invest at least 25 percent of deposits in government debt or other low-risk securities.

“Even though a liquidity deficit is consistent with an anti-inflation stance, an excessive deficit can be disruptive to both financial markets and credit growth,” Subbarao, who has been at the helm of the central bank since September 2008, said in a statement on Nov. 9.

Deficit Plan

Finance Minister Pranab Mukherjee plans to cut the federal government’s budget deficit to 5.5 percent of gross domestic product this fiscal year from an estimated 6.9 percent in the previous 12 months.

The 10-year federal bond yield climbed 5 basis points yesterday to 8.07 percent. The sovereign yield is the highest among the major emerging economies except Brazil, where similar- maturity notes pay 12.3 percent. Comparable bonds in China offer 3.9 percent and 2.64 percent in the U.S., Bloomberg data show.

India’s government bonds returned 4 percent this year, the third-worst performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc.

“Yields are attractive at current levels on state as well as central government debt,” Navneet Munot, who oversees $8.5 billion as chief investment officer at Mumbai-based SBI Funds Management Pvt., a unit of the nation’s biggest lender, said in an interview yesterday. “But the pressure on liquidity may still be holding investors back.”

Fixing Rates

The cost of fixing rates on money for three months surged 276 basis points this year to 6.7 percent in India’s interest- rate swaps market, data compiled by Bloomberg show. The government sold 40 billion rupees of 91-day bills yesterday at 6.85 percent and auctioned 20 billion rupees of 182-day debt at 7.17 percent.

India’s rupee has appreciated 5 percent against the dollar this year as higher debt yields have attracted inflows of $10 billion into its debt markets during the period, Securities & Exchange Board of India data show. That was more than the combined inflows in the previous eight years. The currency rose 0.1 percent yesterday, according to data compiled by Bloomberg.

A slide in the cost of protecting the debt of government- owned State Bank of India, which some investors perceive as a proxy for the nation, signaled rising confidence in the ability of the government to achieve its deficit target. The cost of credit-default swaps on the lender has decreased 78 basis points to 161 points from a one-year high reached in May, according to data provider CMA.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“A substantial amount of monetary tightening has already been done through both policy rate increases as well as the extended money-market crunch,” Sonal Varma, a Mumbai-based economist at Nomura, said in an interview yesterday. “Given the monetary policy typically takes effect with a lag, the RBI is likely to pause rate increases for now.”

The IMF predicted China would be the world’s fastest- growing major economy this year, at 10.5 percent.