Mukherjee Cutting Debt Sales Drives Flattest Curve Since '08: India Credit

For the first time in seven years India’s government may be preparing to reduce debt sales, spurring a rally in longer-dated bonds.

Yields on 10-year bonds fell to within 27 basis points of two-year debt on Feb. 23, the least since December 2008, data compiled by Bloomberg show. Eight of 12 economists in a Bloomberg News survey predict policy makers will cut borrowings in the year starting April 1. The finance ministry may raise 4.3 trillion rupees ($94.6 billion), about 5 percent less than planned this fiscal year, CLSA Asia-Pacific Markets said.

Investors are already anticipating fewer offerings, helping drive a 0.7 percent return on rupee-denominated debt this month, the best performance in Asia after Indonesia, indexes compiled by HSBC Holdings Plc show. Finance Minister Pranab Mukherjee has room to maneuver in the federal budget on Feb. 28 because less bonds are due for repayment and phone-license sales last year may leave him with as much as 40 billion rupees of surplus cash.

“The drop in the spreads indicates that long-term growth fundamentals remain strong and the markets are less concerned about the budget deficit,” Killol Pandya, who manages the equivalent of $300 million as the Mumbai-based head of fixed income at Daiwa Mutual Fund, said in an interview yesterday.

India has run fiscal deficits every year for more than three decades. The nation’s debt obligations have risen from 28.71 billion rupees in 1981, according to earliest-available data from the central bank.
Fiscal Shortfall

The deficit shortfall in the nine months through December was 45 percent of the full-year target of 3.81 trillion rupees, official data show. In the new fiscal year, it may drop to 4.8 percent of gross domestic product from an estimated 5.2 percent in the current 12-month period, Chakravarthy Rangarajan, the prime minister’s chief economic adviser, told reporters Feb. 21.

The International Monetary Fund estimates the deficit, which includes state governments’ finances, will be the highest among the so-called BRIC economies at 8.5 percent of GDP in 2011. That compares with 3.6 percent in Russia, 1.9 percent in China and 1.2 percent in Brazil.

The yield on India’s 8.13 percent bonds due September 2022 touched 8.08 percent on Feb. 22, the lowest level since Jan. 5, on speculation demand is increasing due to the absence of new offerings. The rate on the most-traded government security was 8.14 percent yesterday, compared with 8.11 percent on Feb. 23.
Borrowing Plan

The government, which budgeted 4.57 trillion rupees in borrowings for the year ending March, scrapped one part of a 100 billion rupee sale in September. It has issued 4.27 trillion rupees of notes between April 1 and Feb. 7, according to data compiled by Bloomberg.

“The positive is there are no supplies scheduled for at least a month,” Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai, said in an interview on Feb. 23. “That is spurring some buying.”

The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has shrunk to 467 basis points from this year’s high of 496 on Jan. 10 amid optimism growth in Asia’s third-biggest economy will push up state revenue. The government forecasts GDP will rise 8.6 percent in the current financial perdion, the most in three years.

Tax collections totaled 3.91 trillion rupees at the end of December, 73 percent of the full-year target. The government also earned 677.2 billion rupees in the form of license fees from third-generation phone licenses it sold in May, more than the budgeted 350 billion rupees.

Debt Repayments

The government needs to repay about 730 billion rupees in the coming fiscal year, compared with 1.12 trillion rupees in the 12 months ending March, according to budget documents.

“There is inherent buoyancy in the economy, which will lead to higher tax collections and lesser dependence on borrowings,” Madan Sabnavis, an economist at Mumbai-based CARE Ratings, said in an interview on Feb. 22.

The rupee has retreated 1.7 percent this year on concern an 11 percent surge in crude-oil prices in New York will raise the government’s subsidy burden. The currency dropped 0.7 percent to 45.48 per dollar yesterday, according to data compiled by Bloomberg.

The government compensates oil companies for selling cooking gas, kerosene and diesel at lower-than-market prices to shield 66 percent of the nation’s 1.2 billion people who live on less than $2 a day from spiraling prices. Subsidies account for about 10 percent of India’s budget.
‘Bearish on Borrowings’

“I am bearish on borrowings for the next year,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview on Feb. 22. “Tax revenues may not be as buoyant as they are this year and subsidies will be higher on oil prices.” She forecasts gross borrowings will be 4.9 trillion rupees in the next financial year.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, is little changed this month at 189 basis points, according to CMA prices.

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.

“India’s approach on deficit reduction will be gradual,” Rajeev Malik, a Singapore-based senior economist at CLSA Asia- Pacific Markets, said in an interview yesterday. “The bond market is unlikely to react negatively to the budget.”