Iran Oil Curbs Swelling Record Deficit May Hold Back Rupee: India Credit

The Indian central bank’s move to block dollar or euro payments for Iranian oil threatens to swell a record current-account deficit, damping investor confidence in the rupee and government debt.

The Reserve Bank of India said on Dec. 27 that trade transactions with Iran must be settled outside the Asian Clearing Union, a regional payment arrangement that had allowed companies to skirt U.S. and European limits on doing business with the Middle Eastern nation. Sourcing the fuel from elsewhere “may impact prices,” B.M. Bansal, chairman of Indian Oil Corp., the nation’s biggest refiner, said last week.

Nomura Holdings Inc. forecasts bond yields will climb and Mumbai-based Kotak Mahindra Bank Ltd. estimates the rupee is likely to fall as much as 4.8 percent this year as the Iran supply disruptions aggravate the cost of rising commodity prices on India’s finances. India’s 10-year bond yield has risen 41 basis points to 7.96 percent since July as crude-oil prices traded in New York climbed 21 percent in the second half of 2010 to $91.38 a barrel.

“In the next three to six months, the current-account deficit is going to get worse, partly accentuated by the Iranian oil-payment issue,” Robert Prior-Wandesforde, the Singapore- based head of India and Southeast Asia economics at Credit Suisse Group AG, said yesterday. “The rupee is getting more vulnerable and bond yields may rise a little.”

Rupee Forecasts

Credit Suisse predicts the shortfall in the current account, which widened to $15.8 billion in the three months ended September from $12.1 billion in the second quarter, may swell to as much as $17 billion by June. India’s foreign exchange reserves were $265.9 billion as of Dec. 24, compared with China’s $2.648 trillion as of Sept. 30.

The rupee will return 3.4 percent in 2011, compared with 5.3 percent for China’s yuan, 0.5 percent for Russia’s ruble and a negative 2.4 percent for Brazil’s real, according to economists surveyed by Bloomberg.

Elsewhere in India’s credit markets, government bonds fell, Indian Overseas Bank began an offering of bonds and IDBI Bank Ltd. Plans to use debt as soon as this week.

Yields on India’s 10-year benchmark bonds increased five basis points to 7.96 percent yesterday. The yield is 461 basis points more than similar-maturity U.S. Treasuries, up from 375 at the end of 2009, data compiled by Bloomberg show. The rate is 46 basis points more than Indonesia’s 7.5 percent, Asia’s second-highest yields.

Yield Forecasts

India’s government bonds returned 5.2 percent last year, according to indexes compiled by HSBC Holdings Plc. The notes underperformed securities in Indonesia, which returned 21.1 percent, the most in Asia. The 7.8 percent security due May 2020 will yield 8.05 percent by the end of this year, according to the median forecast of six economists in a Bloomberg survey.

“Over the next couple of weeks, bond yields may rise to as much as 8.1 percent,” Vivek Rajpal, an interest-rate strategist at Nomura in Mumbai, said in an interview yesterday. “If commodity prices rise sharply, the yield may increase to 8.2 percent.”

Indian Overseas Bank, a state-run lender, began the sale of 9.25 billion rupees ($207 million) of 15-year subordinated bonds yesterday, according to two people familiar with the matter. The so-called upper Tier 2 notes pay a coupon of 9 percent, the people said, asking not to be identified as the information is private. The bonds have an option allowing the company to buy the debt back at the end of the 10th year, the people said.

IDBI Plans Sale

IDBI Bank Ltd., the Indian state-owned lender, plans to sell 10 billion rupees of 10-year bonds as soon as tomorrow, according to two people familiar with the matter. The bonds pay a coupon of 9.04 percent, the people said, asking not to be identified as the information is private.

The United Nations stepped up punitive measures in June against Iran over its nuclear ambitions, applying a fourth round of sanctions, and the U.S. and European Union later imposed additional restrictions. Iran says it is enriching uranium for power generation.

Refiners in India have traditionally used the ACU, which settles payments in dollars and euros, to pay for oil purchases from Iran. Regulations endorsed by the EU in October required deals involving Iran and the euro to be accompanied by a certificate outlining payment details for each and every transaction, the EU said on its website.

ACU Mechanism

Under the ACU mechanism, payments for all trade deals between member countries are settled every two months, with individual transactions not accounted for separately.

“If companies are forced to buy crude at higher prices, that may fuel inflation fears,” Philippe Petit, a senior investment manager in Singapore at Pictet Asset Management SA, which manages $17 billion of emerging-market debt including Indian government and corporate bonds, said in an interview yesterday. “It all depends on how long they take to sort out the payment issue.”

India buys about 21 million metric tons from Iran every year, or about 14 percent of total crude-oil imports, Oil Secretary S. Sundareshan said on Dec. 30. The Middle Eastern nation is India’s second-biggest oil supplier, after Saudi Arabia, Oil Minister Murli Deora said in parliament on April 15.

“Buying such huge quantities of crude on the spot market isn’t feasible, and you don’t get any sweetheart deals there,” Praveen Kumar, the Singapore-based head of the South Asia oil- and-gas team at consultancy and advisory firm FACTS Global Energy, said in an interview yesterday. “They would want to resolve this as soon as possible because I don’t think they have a Plan B here.”

‘In Focus’

The rupee, which gained 4.1 percent last year, was unchanged at 44.7150 per dollar yesterday, according to data compiled by Bloomberg.

“In 2011 we are talking about a depreciation of the rupee rather than an appreciation as the wide current-account deficit will continue to be in focus,” Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai, said in an interview yesterday. He forecasts the currency, whose movements will be “extremely volatile,” could slide to as much as 47 per dollar.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, was 160 basis points on Dec. 31. Prices for the credit- default swaps, which 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, climbed 42 basis points last year. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Indian Oil, which imports about 3 million metric tons of crude a year from Iran, fell for a third consecutive month in December. The yield on the 4.75 percent notes due January 2015 climbed 24 basis points to 3.91 percent last month, according to data compiled by Bloomberg.