A government plan to borrow 500 billion rupees ($9.5 billion) from state banks will reduce the need to increase record sales of new bonds and help the market extend the best rally among the biggest emerging nations.
The country may use land and shares as collateral to raise the money, two officials with direct knowledge of the matter said yesterday. Rupee-denominated notes returned 2.7 percent this month, JPMorgan & Chase Co. data show, as 10-year yields slid 34 basis points to 8.40 percent. Local-currency debt earned 0.8 percent in Brazil, 1.1 percent in China and 0.06 percent in Russia, the data show.
Sovereign bonds have surged the most this month since May 2010 as the Reserve Bank of India halted a record run of interest-rate increases on the first contraction in factory output since 2009. Nomura Holdings Inc. and Standard Chartered Plc predict that the government will raise its debt-sale target for a second time in the fiscal year ending March 31 as the deepening slump erodes revenue.
“This would help the government’s budget management and lowers the chances of another increase in market borrowings,” Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura, Japan’s biggest brokerage, said in an interview yesterday. “If indeed there is no further increase in debt supply, then we could see benchmark bonds rallying further.”
India will set up a fund by Jan. 15 that will use government stakes in non-state companies including ITC Ltd. (ITC), Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT) as collateral, the officials said, declining to be identified before a public announcement on the deal. The company will use the funds raised to buy the government’s stakes in state-run firms, the officials said, boosting federal revenue and supporting Finance Minister Pranab Mukherjee’s efforts to trim the budget deficit.
Delayed Sales
The plan may help the nation use assets the officials said are valued at 1 trillion rupees and prevent the failure of an earlier government proposal to raise 400 billion rupees in the fiscal year ending March 31 from sales of shares in state-owned companies.
A 23 percent drop in the benchmark BSE India Sensitive Index (SENSEX) of shares this year prompted Mukherjee to delay selling stock of Oil & Natural Gas Corp., Steel Authority of India Ltd. and Indian Oil Corp. The minister has raised 11.44 billion rupees through asset sales this fiscal year compared with 227.63 billion rupees in the 12 months through March, 2011, according to data provided by the Department of Disinvestment.
Deficit Challenge
The government plans to cut the revenue shortfall to a four-year low of 4.6 percent of gross domestic product by March 31, according to budget estimates. Moody’s Investors Service said this week that the deficit will widen to 7.6 percent this year. The Finance Ministry increased its annual debt-sale target by 13 percent in September to a record 4.7 trillion rupees.
Bond risk in India surged the most among the largest developing nations in 2011 amid concern public finances will worsen.
The cost of protecting the debt of State Bank of India, seen as a proxy for the nation, against non-payment for five years using credit-default swaps jumped 231 basis points this year to 392 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Contracts on China’s government bonds increased 77 basis points to 149, while Russia’s climbed 132 to 279 and Brazil’s added 50 to 161. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
The rupee strengthened 0.1 percent to 52.70 a dollar today.
‘Surprise Move’
“There’s no doubt that this surprise move by India will help in meeting the deficit target and have a benign impact on market sentiment,” Gopal Agrawal, chief investment officer at a local unit of South Korea’s Mirae Asset Financial Group in Mumbai, said in an interview yesterday. “Everybody will be keenly watching how quickly and effectively the government works out the modalities.”
Yields on benchmark 8.79 percent notes due in November 2021 declined 15 basis points after a government report on Dec. 12 showed that industrial production shrank 5.1 percent in October from a year earlier. The yield, which rose five basis points today, will drop to 8.25 percent next month, should the government refrain from increasing debt sales, Nomura predicts.
Growth Forecast Cut
Central bank Governor Duvvuri Subbarao signaled yesterday that Asia’s third-largest economy may expand less than an earlier estimate of 7.6 percent in the year through March 2012. Indian inflation, which slowed to 9.11 percent last month from 9.73 percent in October, will decelerate to 7 percent by March, the central bank predicts.
“Growth worries are probably beginning to outweigh inflation concerns,” M. Natarajan, Mumbai-based head of treasury at the Bank of Nova Scotia, said in an interview on Dec. 20. “Investors now expect the Reserve Bank to cut rates in January instead of waiting until March or April.”
Slower inflation is encouraging international investors to boost investments in Indian bonds, which yield more than four times as much as U.S. Treasuries. Overseas funds bolstered holdings of rupee government and corporate debt by $8.2 billion this year to a record $25.8 billion on Dec. 20. The extra yield demanded on 10-year Indian government debt over similar-dated Treasuries was 638 basis points today.
Government bonds are also rallying after the central bank resumed open-market purchases of sovereign debt last month for the first time since January to boost the amount of cash in the banking system. The monetary authority has purchased 331 billion rupees of government debt at auctions in the past month, central bank data show.
“The outlook for bonds is positive in the medium term as the monetary cycle may turn,” Roy Paul, deputy general manager of treasury at Federal Bank Ltd. in Mumbai, said in an interview yesterday.
To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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