Locking in Rates Rises Most in Two Months as Factories Boom: India Credit

The cost of fixing five-year borrowing costs in India rose the most in two months this week on speculation companies are expanding production and improving earnings even after eight interest-rate increases.

The five-year swap contract jumped as high as 18 basis points this week to touch 8.10 percent yesterday, the most since early February. Factory output probably climbed 5 percent in February from a year earlier after January’s 3.7 percent gain, according to the median of 23 estimates in a Bloomberg News survey before an April 11 report.

Earnings of India’s biggest businesses for last quarter may add to signs that the central bank has failed to cool the economy and curb prices with 200 basis points of rate increases since March 2010, the most among BRIC nations. Reliance Industries Ltd. (RIL), the nation’s largest listed company, may report a 13 percent jump in net income, while that of Tata Motors Ltd. (TTMT) may triple, separate analyst surveys show.

“Consumer demand is pretty strong and that is keeping inflation high,” said Rajeev Malik, a senior economist at CLSA Asia Pacific Markets in Singapore. “The RBI will stay with its anti-inflation bias and I don’t think anyone can say that May will not see a rate hike.”

Malik expects the Reserve Bank of India to raise its benchmark repurchase rate by a quarter of a percentage point to 7 percent in the May 3 policy announcement. That would be the ninth move in 15 months.
Capacity Expansion

Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, plans to boost capacity by 21 percent in the year started April 1 as part of investment plans totaling as much as 40 billion rupees ($905 million), Chief Financial Officer Ajay Seth said in an interview on April 6. The company’s sales climbed to a record in March.

The yield on India’s 7.8 percent bond due May 2020 has climbed four basis points to 7.97 percent in the past month. Malik expects the yield to touch 8.3 percent by the end of September.

The industrial production data show consumer demand is holding up, threatening to stoke India’s inflation, the quickest after Russia among the so-called BRIC nations. Benchmark wholesale-price inflation rate may accelerate to 8.40 percent in March from 8.31 percent in the previous month, a Bloomberg News survey of 19 economists showed before an April 15 report.
‘Monetary Response’

Reserve Bank Governor Duvvuri Subbarao predicted last month the price gauge would reach 8 percent by March 31, 2011, compared with 7 percent estimated on Jan. 25.

“In the absence of a strong supply response, increasing demand will inevitably lead to higher prices,” Reserve Bank Deputy Governor Subir Gokarn said April 5. He said a “monetary response is warranted” if demand exceeds supply and stokes inflation.

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the year ending March 31, 2012, the finance ministry forecast in February.

Salaries in India in 2011 may rise the most in the Asia- Pacific region, a survey by Aon Hewitt LLC showed March 8. Spending under the government’s National Rural Employment Guarantee Act of 2005 has surged almost fourfold to 399 billion rupees.

Indian bonds have returned 2.1 percent this year, the second-best performance in Asia after Indonesia, according to 10 Asian local-currency debt indexes tracked by HSBC Holdings Plc. The difference in yields between India’s 10-year bonds and similar-maturity U.S. Treasuries rose to 441 basis points from 393 points a year ago.
Consumer Demand

“Inflation will remain high on the back of strong consumer demand,” said Ganti N. Murthy, who manages about $1.1 billion of assets as head of fixed income at Peerless Mutual Fund in Mumbai. “Uncomfortably high inflation will keep the RBI in tightening mode this year.”

Murthy expects the central bank to raise rates by as much as 50 basis points by the end of September and the yield on the 10-year bond to rise to 8 percent by the middle of May.

Rising oil and commodity costs and sustained economic growth are escalating pressure on Asian central banks to boost borrowing costs even as Japan’s disaster and Europe’s sovereign- debt woes cloud the global outlook. China on April 5 raised rates for the fourth time in less than six months. Vietnam, Taiwan, South Korea and Thailand increased their benchmark rates in March or April to curb inflation.
Rising Rupee

The rupee strengthened 1.5 percent against the dollar in March, the second-best performance among Asia’s 10 most-traded currencies, as India’s higher interest rates attracted inflows.

The nation’s policy rate of 6.75 percent, which matches Indonesia’s, is the highest among the region’s 10 biggest economies. The currency weakened 0.1 percent to 44.21 a dollar yesterday, according to data compiled by Bloomberg.

Credit Suisse Group AG said this week India’s central bank may stop raising rates by the end of 2011 to protect growth.

“Sticky inflation should see the central bank raise rates another couple of times by July, before growth concerns begin to emerge,” said Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore. “We would not rule out the possibility of RBI switching from a tightening to an easing mode toward early 2012.”

India’s economy may grow 7.5 percent in the fiscal year through March 2012, Prior-Wandesforde said April 5, reducing his growth forecast from an earlier estimate of 7.7 percent.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, fell 7 basis points to 158 basis points on April 6, 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.