Cash Crunch Means RBI Seen Buying 300 Billion Rupees of Debt: India Credit

India’s government may buy more bonds from the market to ease the worst cash crunch in 10 years, according to companies obliged to bid at debt auctions.

The yield on the benchmark 2020 security has dropped 10 basis points from a 26-month high of 8.21 percent in the past week as the Reserve Bank of India bought back 101 billion rupees ($2.2 billion) of securities on behalf of the finance ministry. Policy makers may purchase 300 billion rupees of notes for the rest of the financial year ending March 31, according to ICICI Securities Primary Dealership Ltd. and IDBI Gilts Ltd., including 120 billion rupees tomorrow, the most this quarter.

“The banking system is short of liquidity, and so the RBI may want to address that through bond buybacks,” Manoj Swain, chief executive officer at Morgan Stanley India Primary Dealer Pvt. in Mumbai, said in a phone interview yesterday, without specifying how much policy makers would purchase.

Governor Duvvuri Subbarao said Dec. 9 he is “deeply conscious” of the shortage of cash in the banking system, even as inflation stays above the central bank’s “tolerance level.” A government report today will show benchmark inflation cooled to 7.45 percent in November from 8.58 percent in October, according to the median estimate of economists in a Bloomberg survey, compared with 8.1 percent in Russia, 5.1 percent in China and 5.6 percent in Brazil.

The central bank injected an average 818 billion rupees every day into banks this quarter, the most since 2000, according to data compiled by Bloomberg. The amount the lenders borrowed is an indication of the shortage of funds in the financial system. The government raised 677.2 billion rupees by auctioning third-generation phone licenses in May and 385.4 billion rupees by selling Internet permits a month later, draining cash from lenders.

Yields Climb

The cost of fixing rates on money for three months surged 293 basis points, or 2.93 percentage points, this year to 6.88 percent in the interest-rate swaps market, data compiled by Bloomberg show. Overnight loan rates between banks averaged 6.6 percent this month, twice the rate a year ago.

The yield on the 7.8 percent bond maturing in May 2020 climbed 2 basis points to 8.11 percent yesterday on concern tax payments will deplete cash in the system. Such payments will total 500 billion rupees this week, according to ICICI Securities Primary Dealership.

“Bond purchases may be a key tool policy makers will look at, with corporate-tax outflows set to add to the liquidity tightness,” Namrata Padhye, a fixed-income strategist at Mumbai-based primary dealer IDBI Gilts, said in an interview yesterday.

Bond Returns

India’s three-month Treasury bill yields have more than doubled to 7.16 percent this year as the Reserve Bank lifted borrowing costs by 150 basis points, the most of any central bank in Asia, data compiled by Bloomberg show. The comparable measure climbed 14 basis points to 10.66 percent in Brazil and 8 basis points to 0.12 percent in the U.S. The rate on similar notes from the People’s Bank of China rose 115 basis points to 2.96 percent.

The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries was 477 basis points yesterday, compared with 372 at the start of the year.

India’s bonds have returned 4.1 percent this year, the fourth-worst performance among 10 local-currency debt markets tracked by HSBC Holdings Plc. Investors in Indonesia’s debt assets earned 22.4 percent, the most in the region, according to Europe’s largest bank.

The rupee, which has appreciated 3 percent this year, dropped 0.2 percent yesterday to 45.14 per dollar, according to data compiled by Bloomberg.

Fiscal Deficit

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has dropped 77 basis points from this year’s peak of 239 on optimism the nation will meet its fiscal-deficit target, according to the data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should the bank fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The government plans to reduce the fiscal deficit to 5.5 percent of gross domestic product in the current financial year from 6.9 percent last year, the sharpest cut in three years, helped by sales of stakes in state-run companies. Prime Minister Manmohan Singh is seeking to raise 400 billion rupees by selling such assets in the year to March to help fund the construction of roads, ports and hospitals.

“The central bank will do more buybacks and try to infuse some money,” Prasanna Ananthasubramaniam, a Mumbai-based chief economist at ICICI Securities Primary Dealership, said in an interview yesterday.