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
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Friday, December 23, 2011
Thursday, December 22, 2011
India Plans to Borrow $9.5 Billion Pledging Assets to Fund Budget Deficit By Anto Antony - Dec 22, 2011
India plans to borrow as much as 500 billion rupees ($9.5 billion) using land and shares as collateral in an effort to narrow a budget deficit, two government officials with direct knowledge of the matter said.
The South Asian nation will set up a fund manager by Jan. 15 that will pledge stocks it holds in non-state companies including ITC Ltd. (ITC), Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identified before a public announcement. The company will use the proceeds to buy the government’s stakes in state-run firms, the officials said.
Finance Minister Pranab Mukherjee is exploring options to bridge a widening budget deficit after raising just 3 percent of a 400 billion rupee asset-sale target for the year ending March 31. The decision may help the government utilize assets the officials said are valued at 1 trillion rupees and narrow the gap that’s fanned inflation and driven the rupee to a record low.
“The government is doing this to raise funds as the market isn’t conducive for asset sales, while they are hard pressed to meet deficit targets,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd.
Share Slump
A 23 percent drop in the benchmark Sensitive Index (SENSEX) this year prompted Mukherjee to delay selling shares of Oil & Natural Gas Corp. (ONGC), Steel Authority of India Ltd. (SAIL) and Indian Oil Corp. (IOCL) He has raised 11.44 billion rupees from 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.
Mukherjee said in October that it would be a “challenge” to meet his aim of narrowing the budget gap to a four-year low of 4.6 percent of gross domestic product as slowing growth reduce tax collections. Moody’s Investors Service yesterday said the deficit will widen to 7.6 percent this year.
The yield on 10-year government bonds fell as much as 2 basis points at 3:26 p.m. in Mumbai, while the Sensex reversed losses and gained 0.8 percent. The rupee pared losses and traded at 52.66 a dollar, 0.3 percent weaker than yesterday’s close.
“There’s no doubt that this surprise move by India will help in meeting the deficit target and have a benign impact on sentiments,” said Gopal Agrawal, chief investment officer at a local unit of South Korea’s Mirae Asset Financial Group in Mumbai. “Everybody will be keenly watching how quickly and effectively the government works out the modalities.”
Transfer Assets
The new holding company will pledge the stakes and real- estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, to state-run banks, the officials said. Specified Undertaking, formed in 2003, will be wound up within three weeks, the officials said.
Moody’s said yesterday that India’s public debt at 70 percent of gross domestic product is a constraint on the nation’s ratings, which are at the lowest investment grade. India’s $1.7 trillion economy expanded 6.9 percent in the three months through September, the slowest pace in more than two years.
The Reserve Bank of India has raised interest rates 13 times since the start of 2010 to lower the inflation rate that has stayed above 9 percent all of this year. In October Governor Duvvuri Subbarao has partly blamed the fiscal deficit for contributing to inflation.
To contact the reporter on this story: Anto Antony in New Delhi at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
The South Asian nation will set up a fund manager by Jan. 15 that will pledge stocks it holds in non-state companies including ITC Ltd. (ITC), Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identified before a public announcement. The company will use the proceeds to buy the government’s stakes in state-run firms, the officials said.
Finance Minister Pranab Mukherjee is exploring options to bridge a widening budget deficit after raising just 3 percent of a 400 billion rupee asset-sale target for the year ending March 31. The decision may help the government utilize assets the officials said are valued at 1 trillion rupees and narrow the gap that’s fanned inflation and driven the rupee to a record low.
“The government is doing this to raise funds as the market isn’t conducive for asset sales, while they are hard pressed to meet deficit targets,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd.
Share Slump
A 23 percent drop in the benchmark Sensitive Index (SENSEX) this year prompted Mukherjee to delay selling shares of Oil & Natural Gas Corp. (ONGC), Steel Authority of India Ltd. (SAIL) and Indian Oil Corp. (IOCL) He has raised 11.44 billion rupees from 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.
Mukherjee said in October that it would be a “challenge” to meet his aim of narrowing the budget gap to a four-year low of 4.6 percent of gross domestic product as slowing growth reduce tax collections. Moody’s Investors Service yesterday said the deficit will widen to 7.6 percent this year.
The yield on 10-year government bonds fell as much as 2 basis points at 3:26 p.m. in Mumbai, while the Sensex reversed losses and gained 0.8 percent. The rupee pared losses and traded at 52.66 a dollar, 0.3 percent weaker than yesterday’s close.
“There’s no doubt that this surprise move by India will help in meeting the deficit target and have a benign impact on sentiments,” said Gopal Agrawal, chief investment officer at a local unit of South Korea’s Mirae Asset Financial Group in Mumbai. “Everybody will be keenly watching how quickly and effectively the government works out the modalities.”
Transfer Assets
The new holding company will pledge the stakes and real- estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, to state-run banks, the officials said. Specified Undertaking, formed in 2003, will be wound up within three weeks, the officials said.
Moody’s said yesterday that India’s public debt at 70 percent of gross domestic product is a constraint on the nation’s ratings, which are at the lowest investment grade. India’s $1.7 trillion economy expanded 6.9 percent in the three months through September, the slowest pace in more than two years.
The Reserve Bank of India has raised interest rates 13 times since the start of 2010 to lower the inflation rate that has stayed above 9 percent all of this year. In October Governor Duvvuri Subbarao has partly blamed the fiscal deficit for contributing to inflation.
To contact the reporter on this story: Anto Antony in New Delhi at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Wednesday, December 21, 2011
Bearish Rupee Bets at Three-Year High as RBI Confidence Ebbs: India Credit By Jeanette Rodrigues - Dec 21, 2011
International investors are boosting bets that India’s rupee will extend the worst slide since 2008 as an economic slump deepens, suggesting a lack of confidence in the central bank’s steps to curb exchange-rate volatility.
Twelve-month non-deliverable forward contracts on the rupee dropped 2 percent this month to 55.85 per dollar even as the Reserve Bank of India introduced measures to boost dollar supply and curb rupee sales. Forwards fell as much as 6.5 percent below onshore spot rupee prices yesterday, the deepest discount since 2008, data compiled by Bloomberg show. Similar contracts signal a 0.7 percent drop in China’s yuan and a 1.2 percent decline for South Korea’s won.
Bond risk in India has surged the most among the largest developing nations this year as the rupee’s 15 percent tumble threatens to further fuel inflation that’s already more than 9 percent, according to CLSA Asia-Pacific Markets. The sliding rupee is also boosting costs for Indian companies, faced with a record $11.4 billion of dollar-bond repayments in 2012.
“While the RBI has taken decisive steps to reduce speculation, these measures don’t necessarily address the underlying cause for the rupee’s weakness,” Olivier Desbarres, head of foreign-exchange strategy for Asia-Pacific ex-Japan at Barclays Capital in Singapore, said in an interview on Dec. 16.
The rupee, the worst performer against the dollar among Asian currencies and of the so-called BRIC nations in 2011, plunged to a record low of 54.305 per dollar on Dec. 15, poised for a third straight quarter of declines, data compiled by Bloomberg show.
Worst of BRICs
Brazil’s real lost 11 percent this year to 1.8598 per dollar and the Russian ruble retreated 3.6 percent to 31.72. The Chinese yuan gained 4.2 percent to 6.3391. The rupee may slide to 60 per dollar next year, according to CLSA and Skandinaviska Enskilda Banken AB.
Currency options signal further declines in the Indian currency. Implied volatility on three-month dollar-rupee options, a gauge of expected exchange-rate swings, doubled in the second half of 2011 to a 19-month high of 14.2 percent this week, data compiled by Bloomberg show.
Similar-dated contracts offering the right to sell the rupee against the dollar cost 350 basis points more than those to buy yesterday, compared with 115 at the end of June. The so- called risk reversal rate was 74 basis points for the yuan, 475 for the ruble, and 825 for the real.
‘Not Real Money’
“This is a sign of rupee weakness driven by foreign investors,” Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong, said in a phone interview on Dec. 13. “Offshore forwards are leading onshore forwards. This means it is possibly not real money.”
Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars on currencies that are traditionally not easily convertible for foreign investors.
The rupee has rebounded 3.5 percent from last week’s lows after the Reserve Bank restricted trades in onshore forward contracts to temper speculation and freed interest rates on dollar deposits held locally to spur fund inflows.
Companies can’t enter into multiple forward contracts to cover a single overseas transaction, the central bank said on Dec. 15. The monetary authority eased rules for overseas borrowings by microfinance companies on Dec. 19.
‘Other Measures’
Last month, policy makers relaxed rules for firms to sell foreign currencies through swaps. They also sold dollars in recent weeks to curb the rupee’s slide, according to Mumbai- based IndusInd Bank Ltd. The central bank sold $943 million of foreign currency in October, compared with $845 million in the previous month, data on its website show.
“These are not the only measures we have,” Reserve Bank Deputy Governor Subir Gokarn told reporters in Mumbai on Dec. 20. “There are other measures we can undertake to bring stability to this market. But for the moment, clearly some degree of stability has returned, and that’s important.”
Indian local currency-denominated debt has returned 6.3 percent this year, compared with the 17 percent earned on Brazilian real bonds, JPMorgan data show. Chinese notes returned 6 percent, while Russia’s gained 5.4 percent, the data show.
The rupee fell more than other Asian currencies as India’s economy slowed and Europe’s debt crisis spurred capital outflows from developing nations. India is more vulnerable as it has Asia’s widest current-account deficit.
Investor Exodus
Factory output fell 5.1 percent in October from a year earlier, the first decline since June 2009, government data showed last week. Governor Duvvuri Subbarao, who has raised borrowing costs 13 times since early 2010 to stem inflation, left rates unchanged on Dec. 16 to support the slowing economy.
Global investors pulled almost $20 billion this year from the stock markets of India, South Korea, Taiwan and Thailand, exchange data show. India’s current-account shortfall widened to $14.2 billion in the three months ended June 30, from $5.4 billion in the first quarter, government data showed.
The gap may widen to to 3.5 percent of gross domestic product in the year ending March, Commerce Secretary Rahul Khullar said this month. India’s GDP was $1.7 trillion in 2010, according to the World Bank.
“The RBI’s measures, along with some intervention, will buy time for the country to address medium-term issues such as the current-account deficit and capital outflows,” Ananth Narayan G., Mumbai-based head of South Asia currency and bonds trading at Standard Chartered Plc in Mumbai. “Those are the root causes of the rupee’s weakness.”
Bond Risk
Yields on 10-year government bonds climbed 42 basis points, or 0.42 percentage point, in 2011. The yield on the 8.79 percent note due 2021 climbed six basis points yesterday in Mumbai to 8.34 percent, according to the central bank’s trading system. Rupee-denominated bonds returned 6.5 percent in 2011, compared with the 20.5 percent earned by Indonesian debt, HSBC Holdings Plc indexes show.
The cost to protect the debt of State Bank of India against non-payment has surged the most this year since 2008 as the rupee weakened. Credit-default swaps on the state-owned lender jumped 234 basis points in 2011 to 395 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. China’s government bonds increased 84 to 152, while those for Russia climbed 128 to 275 and Brazil’s added 51 to 162.
Retail Investment
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. State Bank is viewed as a proxy for India by investors as the nation doesn’t have dollar- denominated debt.
The central bank predicts Indian inflation, which slowed to 9.11 percent in November from 9.73 percent the previous month, will slow to 7 percent by March.
“Since inflation is on an easing path, investors are betting on a cut in interest rates in the coming months,” N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd., said in an interview on Dec. 16. That is “encouraging for bond investors.”
Overseas funds boosted holdings of rupee-denominated government and corporate debt by $8.16 billion this year to a record $25.8 billion on Dec. 20, exchange data show. Investors still demand extra yield of 642 basis points to hold India’s 10- year sovereign notes over similar-dated U.S. Treasuries.
The central bank’s latest measures show “the commitment of the RBI to fight further rupee depreciation,” Sebastien Barbe, chief emerging-market strategist in Paris at Credit Agricole CIB, said in an interview on Dec. 15. “I think this draws a line in the sand at close to 54 per dollar.”
To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Twelve-month non-deliverable forward contracts on the rupee dropped 2 percent this month to 55.85 per dollar even as the Reserve Bank of India introduced measures to boost dollar supply and curb rupee sales. Forwards fell as much as 6.5 percent below onshore spot rupee prices yesterday, the deepest discount since 2008, data compiled by Bloomberg show. Similar contracts signal a 0.7 percent drop in China’s yuan and a 1.2 percent decline for South Korea’s won.
Bond risk in India has surged the most among the largest developing nations this year as the rupee’s 15 percent tumble threatens to further fuel inflation that’s already more than 9 percent, according to CLSA Asia-Pacific Markets. The sliding rupee is also boosting costs for Indian companies, faced with a record $11.4 billion of dollar-bond repayments in 2012.
“While the RBI has taken decisive steps to reduce speculation, these measures don’t necessarily address the underlying cause for the rupee’s weakness,” Olivier Desbarres, head of foreign-exchange strategy for Asia-Pacific ex-Japan at Barclays Capital in Singapore, said in an interview on Dec. 16.
The rupee, the worst performer against the dollar among Asian currencies and of the so-called BRIC nations in 2011, plunged to a record low of 54.305 per dollar on Dec. 15, poised for a third straight quarter of declines, data compiled by Bloomberg show.
Worst of BRICs
Brazil’s real lost 11 percent this year to 1.8598 per dollar and the Russian ruble retreated 3.6 percent to 31.72. The Chinese yuan gained 4.2 percent to 6.3391. The rupee may slide to 60 per dollar next year, according to CLSA and Skandinaviska Enskilda Banken AB.
Currency options signal further declines in the Indian currency. Implied volatility on three-month dollar-rupee options, a gauge of expected exchange-rate swings, doubled in the second half of 2011 to a 19-month high of 14.2 percent this week, data compiled by Bloomberg show.
Similar-dated contracts offering the right to sell the rupee against the dollar cost 350 basis points more than those to buy yesterday, compared with 115 at the end of June. The so- called risk reversal rate was 74 basis points for the yuan, 475 for the ruble, and 825 for the real.
‘Not Real Money’
“This is a sign of rupee weakness driven by foreign investors,” Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong, said in a phone interview on Dec. 13. “Offshore forwards are leading onshore forwards. This means it is possibly not real money.”
Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars on currencies that are traditionally not easily convertible for foreign investors.
The rupee has rebounded 3.5 percent from last week’s lows after the Reserve Bank restricted trades in onshore forward contracts to temper speculation and freed interest rates on dollar deposits held locally to spur fund inflows.
Companies can’t enter into multiple forward contracts to cover a single overseas transaction, the central bank said on Dec. 15. The monetary authority eased rules for overseas borrowings by microfinance companies on Dec. 19.
‘Other Measures’
Last month, policy makers relaxed rules for firms to sell foreign currencies through swaps. They also sold dollars in recent weeks to curb the rupee’s slide, according to Mumbai- based IndusInd Bank Ltd. The central bank sold $943 million of foreign currency in October, compared with $845 million in the previous month, data on its website show.
“These are not the only measures we have,” Reserve Bank Deputy Governor Subir Gokarn told reporters in Mumbai on Dec. 20. “There are other measures we can undertake to bring stability to this market. But for the moment, clearly some degree of stability has returned, and that’s important.”
Indian local currency-denominated debt has returned 6.3 percent this year, compared with the 17 percent earned on Brazilian real bonds, JPMorgan data show. Chinese notes returned 6 percent, while Russia’s gained 5.4 percent, the data show.
The rupee fell more than other Asian currencies as India’s economy slowed and Europe’s debt crisis spurred capital outflows from developing nations. India is more vulnerable as it has Asia’s widest current-account deficit.
Investor Exodus
Factory output fell 5.1 percent in October from a year earlier, the first decline since June 2009, government data showed last week. Governor Duvvuri Subbarao, who has raised borrowing costs 13 times since early 2010 to stem inflation, left rates unchanged on Dec. 16 to support the slowing economy.
Global investors pulled almost $20 billion this year from the stock markets of India, South Korea, Taiwan and Thailand, exchange data show. India’s current-account shortfall widened to $14.2 billion in the three months ended June 30, from $5.4 billion in the first quarter, government data showed.
The gap may widen to to 3.5 percent of gross domestic product in the year ending March, Commerce Secretary Rahul Khullar said this month. India’s GDP was $1.7 trillion in 2010, according to the World Bank.
“The RBI’s measures, along with some intervention, will buy time for the country to address medium-term issues such as the current-account deficit and capital outflows,” Ananth Narayan G., Mumbai-based head of South Asia currency and bonds trading at Standard Chartered Plc in Mumbai. “Those are the root causes of the rupee’s weakness.”
Bond Risk
Yields on 10-year government bonds climbed 42 basis points, or 0.42 percentage point, in 2011. The yield on the 8.79 percent note due 2021 climbed six basis points yesterday in Mumbai to 8.34 percent, according to the central bank’s trading system. Rupee-denominated bonds returned 6.5 percent in 2011, compared with the 20.5 percent earned by Indonesian debt, HSBC Holdings Plc indexes show.
The cost to protect the debt of State Bank of India against non-payment has surged the most this year since 2008 as the rupee weakened. Credit-default swaps on the state-owned lender jumped 234 basis points in 2011 to 395 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. China’s government bonds increased 84 to 152, while those for Russia climbed 128 to 275 and Brazil’s added 51 to 162.
Retail Investment
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. State Bank is viewed as a proxy for India by investors as the nation doesn’t have dollar- denominated debt.
The central bank predicts Indian inflation, which slowed to 9.11 percent in November from 9.73 percent the previous month, will slow to 7 percent by March.
“Since inflation is on an easing path, investors are betting on a cut in interest rates in the coming months,” N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd., said in an interview on Dec. 16. That is “encouraging for bond investors.”
Overseas funds boosted holdings of rupee-denominated government and corporate debt by $8.16 billion this year to a record $25.8 billion on Dec. 20, exchange data show. Investors still demand extra yield of 642 basis points to hold India’s 10- year sovereign notes over similar-dated U.S. Treasuries.
The central bank’s latest measures show “the commitment of the RBI to fight further rupee depreciation,” Sebastien Barbe, chief emerging-market strategist in Paris at Credit Agricole CIB, said in an interview on Dec. 15. “I think this draws a line in the sand at close to 54 per dollar.”
To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Tuesday, December 20, 2011
Double Whammy for Corporates as Record Debt Payments Looming: India Credit By Anurag Joshi - Dec 20, 2011
Indian companies have a record $11.4 billion of dollar-denominated bonds to repay in 2012 just as the rupee falls to an all-time low and borrowing costs in the U.S. currency exceed all but one of Asia’s markets.
Companies have more than double the debt coming due next year compared with a five-year average of $5.6 billion, while ICICI Bank Ltd. (ICICIBC) and Bank of Baroda have the most maturing debt, according to data compiled by Bloomberg. Yields on Indian company dollar-denominated bonds have increased for five straight quarters and currently sit at 6.85 percent, the second- highest level among 11 Asian countries tracked by HSBC Holdings Plc.
The rupee’s 15.5 percent drop against the dollar this year to the weakest level in data compiled by Bloomberg going back to 1973 makes paying back dollar debt more expensive for Indian companies earning income in rupees. Lower profits will damp economic growth that Prime Minister Manmohan Singh said will increase 7.5 percent in the fiscal year ending March 31.
“There is a dual impact on widening of refinancing costs and the depreciating rupee,” Ananda Bhoumik, a Mumbai-based vice president at Fitch Ratings said in a phone interview on Dec. 16. “Dollar spreads have widened overseas, so refinancing debt through borrowing abroad is also costlier.”
The extra yield investors demand to hold dollar-denominated bonds sold by Indian companies rather than U.S. Treasuries rose 290 basis points, or 2.9 percentage points, this year to 615.2 basis points yesterday, according to indexes compiled by HSBC. Borrowers are paying a premium that’s more than double the 262 basis-point spread for debt of U.S. corporates, according to Bank of American Merrill Lynch indexes.
No Access
Yields on India’s corporate bonds may be pushed higher by a decline in benchmark Treasury bonds, with yields on 10-year Treasury notes expected to rise 88 basis points to 2.7 percent by the end of 2012, according to 70 analysts surveyed by Bloomberg.
“Our liquid funds and repayments from the asset side would be the primary source of funding for meeting the bond repayment obligations and we do not expect to access the markets for refinancing,” ICICI Bank said in an e-mailed reply to questions yesterday. Bank of Baroda Chairman M.D.Mallya declined to comment yesterday.
Indian companies sold $9.2 billion of non-rupee bonds this year, compared with $8.7 billion last year, according to data (BOB) compiled by Bloomberg.
“The rupee’s fall is beyond any speculation and now issuers have to ensure they repay bondholders,” M.V. Tanksale, chairman of Central Bank of India, said in an interview yesterday. “Their refinancing options are few because domestic liquidity is tight and there is a debt crisis in Europe.”
Europe’s Debt Crisis
Relative yields on company bonds from the U.S. to Europe and Asia have expanded 102 basis points to 271 this year as the European sovereign debt crisis intensified, threatening global growth and corporate earnings. That’s the biggest annual increase since a 329 basis-point jump in 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
“Issuers would resort to an approach that doesn’t disrupt their business processes and that won’t hamper investor confidence,” Arun Kaul, chairman of Kolkata-based Uco Bank said in a phone interview yesterday. “They will have to bear a cost for this which has risen in an unprecedented way in the form of a sharp depreciation in the rupee.”
Refinancing overseas debt in the next 12 months may be challenging for Indian companies “if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending,” Moody’s Investors Service said in the Dec. 14 report.
Rising Yields
Lenders borrowed 1.7 trillion rupees ($32 billion) from the Reserve Bank of India overnight on Dec. 19, the most this year, indicating a shortage of cash in the banking system. They borrowed 1.6 trillion rupees yesterday, according to central bank data.
ICICI Bank, India’s largest private lender, has the equivalent of $3.7 billion of principal payments on bonds and loans due in 2012, data compiled by Bloomberg show. Bank of Baroda, a Vadodara, north-east India-based lender, has $216 million of interest payments due, the data show.
The rupee was little changed at 52.89 per dollar in Mumbai yesterday, according to data compiled by Bloomberg.
Yields on 10-year government bonds have gained 40 basis points this year as the central bank raised the benchmark repurchase rate by 375 basis points since March 2010 to curb inflation. Reserve Bank of India Governor Duvvuri Subbarao left the rate unchanged at a three-year high of 8.5 percent on Dec. 16, halting the fastest round of increases on record.
Yields on the 8.79 percent bonds due November 2021 fell five basis points to 8.28 percent in Mumbai yesterday, according to the central bank’s trading system.
Default Swaps
The cost of insuring the debt of State Bank of India against non-payment was little changed at 395 basis points on Dec. 19, up from 161 at the end of last year, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. State Bank is regarded as a proxy for the nation, which doesn’t have dollar debt.
Credit-default swaps insuring the sovereign debt of the biggest emerging-market nations have also increased. Contracts on Brazil have risen 53 basis points to 164 this year, while those on China have more than doubled to 150, according to CMA. Russia’s are up 129 to 276. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Rupee ‘Surprise’
Sales of rupee-denominated bonds plunged 15 percent to 1.7 trillion rupees this year as companies sought cheaper methods of fundraising, data compiled by Bloomberg show.
The cost of borrowing in rupee bond markets is 250 basis points higher than average yields for dollar debt, with five- year AAA rated corporate debt yielding 9.35 percent, according to data compiled by Bloomberg.
“The rupee’s fall will come as a surprise for many companies,” Parthasarathi Mukherjee, Mumbai-based president of treasury and international banking at Axis Bank Ltd., the biggest rupee-denominated bond arranger this year, said in a phone interview on Dec. 19. “Some companies will be under pressure and defaults can’t be entirely ruled out.”
To contact the reporter on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net
To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Companies have more than double the debt coming due next year compared with a five-year average of $5.6 billion, while ICICI Bank Ltd. (ICICIBC) and Bank of Baroda have the most maturing debt, according to data compiled by Bloomberg. Yields on Indian company dollar-denominated bonds have increased for five straight quarters and currently sit at 6.85 percent, the second- highest level among 11 Asian countries tracked by HSBC Holdings Plc.
The rupee’s 15.5 percent drop against the dollar this year to the weakest level in data compiled by Bloomberg going back to 1973 makes paying back dollar debt more expensive for Indian companies earning income in rupees. Lower profits will damp economic growth that Prime Minister Manmohan Singh said will increase 7.5 percent in the fiscal year ending March 31.
“There is a dual impact on widening of refinancing costs and the depreciating rupee,” Ananda Bhoumik, a Mumbai-based vice president at Fitch Ratings said in a phone interview on Dec. 16. “Dollar spreads have widened overseas, so refinancing debt through borrowing abroad is also costlier.”
The extra yield investors demand to hold dollar-denominated bonds sold by Indian companies rather than U.S. Treasuries rose 290 basis points, or 2.9 percentage points, this year to 615.2 basis points yesterday, according to indexes compiled by HSBC. Borrowers are paying a premium that’s more than double the 262 basis-point spread for debt of U.S. corporates, according to Bank of American Merrill Lynch indexes.
No Access
Yields on India’s corporate bonds may be pushed higher by a decline in benchmark Treasury bonds, with yields on 10-year Treasury notes expected to rise 88 basis points to 2.7 percent by the end of 2012, according to 70 analysts surveyed by Bloomberg.
“Our liquid funds and repayments from the asset side would be the primary source of funding for meeting the bond repayment obligations and we do not expect to access the markets for refinancing,” ICICI Bank said in an e-mailed reply to questions yesterday. Bank of Baroda Chairman M.D.Mallya declined to comment yesterday.
Indian companies sold $9.2 billion of non-rupee bonds this year, compared with $8.7 billion last year, according to data (BOB) compiled by Bloomberg.
“The rupee’s fall is beyond any speculation and now issuers have to ensure they repay bondholders,” M.V. Tanksale, chairman of Central Bank of India, said in an interview yesterday. “Their refinancing options are few because domestic liquidity is tight and there is a debt crisis in Europe.”
Europe’s Debt Crisis
Relative yields on company bonds from the U.S. to Europe and Asia have expanded 102 basis points to 271 this year as the European sovereign debt crisis intensified, threatening global growth and corporate earnings. That’s the biggest annual increase since a 329 basis-point jump in 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
“Issuers would resort to an approach that doesn’t disrupt their business processes and that won’t hamper investor confidence,” Arun Kaul, chairman of Kolkata-based Uco Bank said in a phone interview yesterday. “They will have to bear a cost for this which has risen in an unprecedented way in the form of a sharp depreciation in the rupee.”
Refinancing overseas debt in the next 12 months may be challenging for Indian companies “if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending,” Moody’s Investors Service said in the Dec. 14 report.
Rising Yields
Lenders borrowed 1.7 trillion rupees ($32 billion) from the Reserve Bank of India overnight on Dec. 19, the most this year, indicating a shortage of cash in the banking system. They borrowed 1.6 trillion rupees yesterday, according to central bank data.
ICICI Bank, India’s largest private lender, has the equivalent of $3.7 billion of principal payments on bonds and loans due in 2012, data compiled by Bloomberg show. Bank of Baroda, a Vadodara, north-east India-based lender, has $216 million of interest payments due, the data show.
The rupee was little changed at 52.89 per dollar in Mumbai yesterday, according to data compiled by Bloomberg.
Yields on 10-year government bonds have gained 40 basis points this year as the central bank raised the benchmark repurchase rate by 375 basis points since March 2010 to curb inflation. Reserve Bank of India Governor Duvvuri Subbarao left the rate unchanged at a three-year high of 8.5 percent on Dec. 16, halting the fastest round of increases on record.
Yields on the 8.79 percent bonds due November 2021 fell five basis points to 8.28 percent in Mumbai yesterday, according to the central bank’s trading system.
Default Swaps
The cost of insuring the debt of State Bank of India against non-payment was little changed at 395 basis points on Dec. 19, up from 161 at the end of last year, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. State Bank is regarded as a proxy for the nation, which doesn’t have dollar debt.
Credit-default swaps insuring the sovereign debt of the biggest emerging-market nations have also increased. Contracts on Brazil have risen 53 basis points to 164 this year, while those on China have more than doubled to 150, according to CMA. Russia’s are up 129 to 276. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Rupee ‘Surprise’
Sales of rupee-denominated bonds plunged 15 percent to 1.7 trillion rupees this year as companies sought cheaper methods of fundraising, data compiled by Bloomberg show.
The cost of borrowing in rupee bond markets is 250 basis points higher than average yields for dollar debt, with five- year AAA rated corporate debt yielding 9.35 percent, according to data compiled by Bloomberg.
“The rupee’s fall will come as a surprise for many companies,” Parthasarathi Mukherjee, Mumbai-based president of treasury and international banking at Axis Bank Ltd., the biggest rupee-denominated bond arranger this year, said in a phone interview on Dec. 19. “Some companies will be under pressure and defaults can’t be entirely ruled out.”
To contact the reporter on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net
To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Monday, December 19, 2011
Default Swaps Jump Most in BRICs as Gandhi Subsidizes Food: India Credit By V Ramakrishnan and Kartik Goyal - Dec 19, 2011
India’s plan to boost food subsidies by 50 percent is threatening efforts to cut the budget deficit, extending the biggest jump in bond risk among the largest developing nations.
The cost to protect the debt of State Bank of India, seen as a proxy for the nation, against non-payment rose 234 basis points in 2011 to 395 basis points, the most in three years, according to data provider CMA. Credit-default swaps on China’s government bonds increased 78 to 146, while those for Russia climbed 124 to 270 and Brazil’s added 53 to 164.
Indian Prime Minister Manmohan Singh is tapping public finances to boost assistance as the economy of the nation, where the World Bank says more than 75 percent of the people live on less than $2 a day, slows. Nomura Holdings Inc. and Standard Chartered Plc predict Finance Minister Pranab Mukherjee will raise his borrowing target for a second time in the fiscal year ending on March 31.
“The passage of the food security bill may further pressure the government’s finances and push its borrowings higher,” A. Balasubramanian, the Mumbai-based chief executive officer of Birla Sun Life Asset Management Co. who oversees the equivalent of $12.1 billion in assets, said in an interview yesterday. “Given the persistent fiscal problems, the continuous supply of government debt will remain a negative factor for the market.”
India’s cabinet approved the Food Security Bill to grant the nation’s poor the right to buy food grains at discount rates, Information and Broadcasting Minister Ambika Soni told reporters in New Delhi on Dec. 18. The bill, aimed at meeting a pledge by the ruling Congress party to spread the benefits of economic growth, will need the consent of the parliament to become law.
Wooing Voters
Prime Minister Singh is betting on the legislation, the drafting of which was overseen by Congress party President Sonia Gandhi, to woo voters before elections in five states in the first half of next year. The government needs to boost food subsidies by 320 billion rupees ($6 billion) to 950 billion rupees a year to implement the policy, which will provide grains to 64 percent of India’s 1.2 billion-strong population, about 768 million people, Food Minister K.V. Thomas told reporters last week.
“The government’s eyes are on state elections next year and the upcoming federal election and hence we will see such populist measures,” Amol Agrawal, a Mumbai-based economist at STCI Primary Dealer Ltd., said in an interview yesterday. “Such measures may be good for the poor but will have negative implications for fiscal health.”
Rising Yields
The rising subsidy burden will force the government to increase its borrowings, maintaining “upward pressure” on sovereign bond yields, Agrawal predicts.
Ten-year government bond yields in India climbed 40 basis points, or 0.40 percentage point, this year, the most after Vietnam among Asian local-currency debt markets, as inflation accelerated and an economic slowdown threatened to crimp government revenue and stymie efforts to narrow the budget shortfall. Yields fell five basis points to 8.33 percent in Mumbai yesterday, according to the central bank’s trading system.
Finance Minister Mukherjee plans to cut the government’s deficit to a four-year low of 4.6 percent of gross domestic product by March 31, according to budget estimates.
Factory output in Asia’s third-largest economy fell 5.1 percent in October from a year earlier, the first contraction since June 2009, as the highest borrowing costs in three years damped demand for goods, government data showed this month. The $1.7 trillion economy expanded 6.9 percent in the three months ended September from a year earlier, the slowest pace since 2009, according to government data.
‘Downward Trajectory’
“Given that we are on a downward growth trajectory, the timing is not appropriate for coming up with policies like the food subsidy bill that add to the fiscal burden when revenues falter,” Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura Holdings, said in an interview yesterday.
Japan’s biggest brokerage predicts India’s government will borrow 300 billion rupees more than already planned in the year through March. Standard Chartered estimates the increase may be at least 400 billion rupees. The Finance Ministry last increased its annual debt-sale target by 13 percent in September to a record 4.7 trillion rupees ($88.5 billion).
Lower Tax Collections
India’s Finance Ministry said in a Dec. 9 report that lower tax collections in a slowing economy and delayed plans to sell stakes in state-owned companies mean it may miss its goal to narrow the budget gap. The economy may expand 7.25 percent to 7.75 percent this fiscal year, less than the 9 percent growth estimated in February, the report showed. Nomura’s Rajpal predicts the budget deficit will widen to 5.5 percent of GDP from 4.7 percent the previous year.
Reserve Bank of India Governor Duvvuri Subbarao has raised the benchmark repurchase rate by 375 basis points since March 2010 to curb inflation. Subbarao left the repo rate unchanged at a three-year high of 8.5 percent on Dec. 16, halting the fastest round of rate increases on record in the country.
DSP Blackrock Investment Managers and Credit Suisse Group AG predict that the Reserve Bank will cut rates in the first half of 2012 as inflation slows, joining central banks from Brazil to China in easing monetary policy. Brazil’s central bank has cut the Selic rate by a total 150 basis points since August to 11 percent, while the People’s Bank of China decreased the reserve ratio for banks by 50 basis points from Dec. 5, the first reduction since 2008.
Improving Bond Returns
Indian bonds are outperforming debt of the largest emerging markets this month as the central bank predicts inflation to slow to 7 percent by March from 9.11 percent in November.
Rupee-denominated notes have returned 2.22 percent in December, JPMorgan & Chase Co. data show. Local-currency securities lost 0.1 percent in Brazil and earned 1.1 percent in China and 0.04 percent in Russia.
“The outlook for bonds will improve over the next six months,” Ganti N. Murthy, the Mumbai-based head of investments at Peerless Mutual Fund, said in an interview yesterday. “Falling inflation may increase returns on fixed-income securities and prompt the central bank to cut rates from March or April.”
Murthy predicts the the 10-year bond yield will fall to 8 percent by the end of March. Yields have already retreated 67 basis points from a three-year high of 9 percent reached last month. Investors demand extra yield of 646 basis points to hold India’s 10-year notes instead of similar-dated U.S. Treasuries. The rupee fell 0.3 percent to 52.88 per dollar yesterday.
Election Pledge
Credit-default swaps on State Bank rose 44 basis points this month, according to data from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. 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. State Bank is viewed as a proxy for India by investors as the nation doesn’t have dollar-denominated debt.
The Food Security Bill will fulfill an election pledge by Singh’s Congress party in 2009 that it will supply 25 kilograms of rice or wheat at below-market rates to poor families each month should the party be voted back into power.
Every Indian falling within the so-called priority category will get 7 kilograms (15.4 pounds) of rice or wheat or millet a month, according to Food Minister Thomas. Rice may be sold at 3 rupees per kilogram, wheat at 2 rupees and millet at 1 rupee. That compares with market prices of 24 rupees a kilogram for rice in New Delhi and 15 rupees a kilogram for wheat, according to data provided by the Food Ministry.
“Once implemented, the food bill will add to the expenditure burden and thus to the fiscal deficit as revenue generation remains under pressure in the current low-growth scenario,” Anubhuti Sahay, a Mumbai-based economist at Standard Chartered, said in an interview yesterday.
To contact the reporters on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
The cost to protect the debt of State Bank of India, seen as a proxy for the nation, against non-payment rose 234 basis points in 2011 to 395 basis points, the most in three years, according to data provider CMA. Credit-default swaps on China’s government bonds increased 78 to 146, while those for Russia climbed 124 to 270 and Brazil’s added 53 to 164.
Indian Prime Minister Manmohan Singh is tapping public finances to boost assistance as the economy of the nation, where the World Bank says more than 75 percent of the people live on less than $2 a day, slows. Nomura Holdings Inc. and Standard Chartered Plc predict Finance Minister Pranab Mukherjee will raise his borrowing target for a second time in the fiscal year ending on March 31.
“The passage of the food security bill may further pressure the government’s finances and push its borrowings higher,” A. Balasubramanian, the Mumbai-based chief executive officer of Birla Sun Life Asset Management Co. who oversees the equivalent of $12.1 billion in assets, said in an interview yesterday. “Given the persistent fiscal problems, the continuous supply of government debt will remain a negative factor for the market.”
India’s cabinet approved the Food Security Bill to grant the nation’s poor the right to buy food grains at discount rates, Information and Broadcasting Minister Ambika Soni told reporters in New Delhi on Dec. 18. The bill, aimed at meeting a pledge by the ruling Congress party to spread the benefits of economic growth, will need the consent of the parliament to become law.
Wooing Voters
Prime Minister Singh is betting on the legislation, the drafting of which was overseen by Congress party President Sonia Gandhi, to woo voters before elections in five states in the first half of next year. The government needs to boost food subsidies by 320 billion rupees ($6 billion) to 950 billion rupees a year to implement the policy, which will provide grains to 64 percent of India’s 1.2 billion-strong population, about 768 million people, Food Minister K.V. Thomas told reporters last week.
“The government’s eyes are on state elections next year and the upcoming federal election and hence we will see such populist measures,” Amol Agrawal, a Mumbai-based economist at STCI Primary Dealer Ltd., said in an interview yesterday. “Such measures may be good for the poor but will have negative implications for fiscal health.”
Rising Yields
The rising subsidy burden will force the government to increase its borrowings, maintaining “upward pressure” on sovereign bond yields, Agrawal predicts.
Ten-year government bond yields in India climbed 40 basis points, or 0.40 percentage point, this year, the most after Vietnam among Asian local-currency debt markets, as inflation accelerated and an economic slowdown threatened to crimp government revenue and stymie efforts to narrow the budget shortfall. Yields fell five basis points to 8.33 percent in Mumbai yesterday, according to the central bank’s trading system.
Finance Minister Mukherjee plans to cut the government’s deficit to a four-year low of 4.6 percent of gross domestic product by March 31, according to budget estimates.
Factory output in Asia’s third-largest economy fell 5.1 percent in October from a year earlier, the first contraction since June 2009, as the highest borrowing costs in three years damped demand for goods, government data showed this month. The $1.7 trillion economy expanded 6.9 percent in the three months ended September from a year earlier, the slowest pace since 2009, according to government data.
‘Downward Trajectory’
“Given that we are on a downward growth trajectory, the timing is not appropriate for coming up with policies like the food subsidy bill that add to the fiscal burden when revenues falter,” Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura Holdings, said in an interview yesterday.
Japan’s biggest brokerage predicts India’s government will borrow 300 billion rupees more than already planned in the year through March. Standard Chartered estimates the increase may be at least 400 billion rupees. The Finance Ministry last increased its annual debt-sale target by 13 percent in September to a record 4.7 trillion rupees ($88.5 billion).
Lower Tax Collections
India’s Finance Ministry said in a Dec. 9 report that lower tax collections in a slowing economy and delayed plans to sell stakes in state-owned companies mean it may miss its goal to narrow the budget gap. The economy may expand 7.25 percent to 7.75 percent this fiscal year, less than the 9 percent growth estimated in February, the report showed. Nomura’s Rajpal predicts the budget deficit will widen to 5.5 percent of GDP from 4.7 percent the previous year.
Reserve Bank of India Governor Duvvuri Subbarao has raised the benchmark repurchase rate by 375 basis points since March 2010 to curb inflation. Subbarao left the repo rate unchanged at a three-year high of 8.5 percent on Dec. 16, halting the fastest round of rate increases on record in the country.
DSP Blackrock Investment Managers and Credit Suisse Group AG predict that the Reserve Bank will cut rates in the first half of 2012 as inflation slows, joining central banks from Brazil to China in easing monetary policy. Brazil’s central bank has cut the Selic rate by a total 150 basis points since August to 11 percent, while the People’s Bank of China decreased the reserve ratio for banks by 50 basis points from Dec. 5, the first reduction since 2008.
Improving Bond Returns
Indian bonds are outperforming debt of the largest emerging markets this month as the central bank predicts inflation to slow to 7 percent by March from 9.11 percent in November.
Rupee-denominated notes have returned 2.22 percent in December, JPMorgan & Chase Co. data show. Local-currency securities lost 0.1 percent in Brazil and earned 1.1 percent in China and 0.04 percent in Russia.
“The outlook for bonds will improve over the next six months,” Ganti N. Murthy, the Mumbai-based head of investments at Peerless Mutual Fund, said in an interview yesterday. “Falling inflation may increase returns on fixed-income securities and prompt the central bank to cut rates from March or April.”
Murthy predicts the the 10-year bond yield will fall to 8 percent by the end of March. Yields have already retreated 67 basis points from a three-year high of 9 percent reached last month. Investors demand extra yield of 646 basis points to hold India’s 10-year notes instead of similar-dated U.S. Treasuries. The rupee fell 0.3 percent to 52.88 per dollar yesterday.
Election Pledge
Credit-default swaps on State Bank rose 44 basis points this month, according to data from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. 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. State Bank is viewed as a proxy for India by investors as the nation doesn’t have dollar-denominated debt.
The Food Security Bill will fulfill an election pledge by Singh’s Congress party in 2009 that it will supply 25 kilograms of rice or wheat at below-market rates to poor families each month should the party be voted back into power.
Every Indian falling within the so-called priority category will get 7 kilograms (15.4 pounds) of rice or wheat or millet a month, according to Food Minister Thomas. Rice may be sold at 3 rupees per kilogram, wheat at 2 rupees and millet at 1 rupee. That compares with market prices of 24 rupees a kilogram for rice in New Delhi and 15 rupees a kilogram for wheat, according to data provided by the Food Ministry.
“Once implemented, the food bill will add to the expenditure burden and thus to the fiscal deficit as revenue generation remains under pressure in the current low-growth scenario,” Anubhuti Sahay, a Mumbai-based economist at Standard Chartered, said in an interview yesterday.
To contact the reporters on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Sunday, December 18, 2011
India Inflation, Infrastructure Problems Persist By Kartik Goyal - Dec 18, 2011
Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd. (MSIL)’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease.
“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”
India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.
The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.
“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”
Cars and Soap
Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. (HUVR) also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.
“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”
Maruti, Godrej Consumer Products Ltd., and Hero MotoCorp Ltd., maker of almost half the motorcycles sold in India, are among hundreds of manufacturers that make their own electricity.
“From the beginning we took the decision to use our own power as the power supplied by the government wasn’t reliable,” said R.C. Bhargava, chairman of Maruti, a unit of Hamamatsu, Japan-based Suzuki Motor Corp., which has made vehicles in India since 1983. “Doing business in India is much costlier.”
Share Discount
The transport delays and power shortages make shares of Indian companies less valuable than those of rivals abroad, said Sadanand Shetty, a Mumbai-based senior fund manager at Taurus Asset Management Co., which manages about $1.3 billion.
“They have to pay a huge cost,” said Shetty. “Indian company shares trade at a discount to competitors overseas.”
Maruti’s estimated price-to-earnings ratio for this fiscal year, a measure of how expensive a stock is within an industry, is 15, compared with 7 for SAIC Motor Corp., China’s biggest automaker, according to data compiled by Bloomberg.
The additional expenses in India add to inflation, limiting the country’s tools to cope with a worsening global economic outlook. The rupee, down 15 percent so far this year, is heading for its second-worst year against the dollar since 1991, when Prime Minister Manmohan Singh, then finance chief, began a shift toward free-market policies.
Higher Inflation
India’s inflation is the highest among the so-called BRIC nations, which include Brazil, Russia and China, with its benchmark gauge rising 9.1 percent in November from a year before. By comparison, China’s rate eased to a 14-month low of 4.2 percent, giving its policy makers more room to support growth as Europe’s debt crisis curbs exports. Russia’s pace was 6.8 percent and Brazil’s 6.6 percent.
The prime minister said in a Dec. 14 interview in New Delhi that “if the international situation doesn’t stand in our way, we will bring down inflation,” predicting it will come down to “no more than 5 or 6 percent.” While international commodity prices have pushed up costs in India, record food production should help ease pressures, he said.
The International Monetary Fund sees India’s consumer-price inflation still outpacing China’s rate by almost 2 percentage points by 2015.
Lasting Disadvantage
“Even if the global economic slowdown provides some relief from inflation in the short term, India will continue to be at a disadvantage until it fixes its problems with power, roads and other infrastructure,” said Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt.
China in 2009 spent an estimated $539 billion on infrastructure, amounting to 10.8 percent of its gross domestic product, compared with $99 billion, or 7.5 percent of GDP, for India, according to Morgan Stanley.
“Look at China, they first put in place all the necessary roads, electricity, power,” said Ravi Sud, chief financial officer of Hero MotoCorp. “That’s the reason they now have faster growth, with manageable levels of inflation. We, on the other hand, are still struggling to take off.”
Singh has pledged to tackle the problem with policies that call for $1 trillion in infrastructure spending between 2012 and 2017.
‘Huge Plans’
“India has huge plans,” said Rajat Nag, managing director-general of the Asian Development Bank. “It’s a question of implementing them. It needs to accelerate the pace of approvals, take care of environmental clearances and issues related to land acquisition. Bottlenecks are a huge drag on the economy.”
Targets to lay more highways and generate more electricity have been repeatedly missed. In the year through March 2011, the National Highways Authority of India built 1,780 kilometers of motorways, about 30 percent less than its target. In the same period, the nation added 9,585 megawatts of power, 34 percent less than forecast.
“The delays have been due to problems in land acquisition, environmental clearances and in some cases poor performance of contractors,” said Manoj Singh, an adviser at the nation’s Planning Commission in New Delhi. “It would be unrealistic to think of matching the U.S. or China in terms of infrastructure. It would take many decades.”
Fitch Ratings changed its outlook for Indian infrastructure projects to negative for 2012, from stable this year, in a report released Dec. 15, citing risks to the credit quality of power projects, airports and toll roads.
Service Gain
India may still reap some reward from the development of industries that don’t rely so heavily on transport networks. Its aggregate share in global commercial services trade will exceed China’s in the next five to six years, driven by information technology, which accounts for about 60 percent of India’s services exports, according to Morgan Stanley.
The country may also get some respite from inflation as a global economic slowdown curbs demand for goods. Exports rose 10.8 percent in October from a year earlier, the least in two years, the Commerce Ministry said Dec. 1. Factory output that month shrank 5.1 percent from a year earlier, the first drop since June 2009, the Central Statistical Office said.
That’s pushed the yield on India’s 10-year government bond close to the level of the one-year note, showing that some investors are betting growth in the country will slow. The Reserve Bank of India in October cut its economic growth forecast to 7.6 percent for the year through March, from 8 percent previously. RBI Governor Duvvuri Subbarao has said his comfort zone for inflation is 4 percent to 6 percent.
Retail Reversal
Prime Minister Singh’s efforts to restrain prices took a blow earlier this month when the government reversed a decision to allow overseas retailers like Wal-Mart Stores Inc. to open supermarkets, after failing to get support from political allies.
Singh and Commerce Minister Anand Sharma have said allowing the investment would create 10 million jobs, and help rein in inflation by reducing the 40 percent of fruit and vegetables that rot before they get to market.
The prime minister vowed in last week’s interview to revive the plan after regional elections next year.
India aims to award projects for 7,300 kilometers of new roads and expressways this fiscal year, and spend 550 billion rupees ($10.4 billion) widening existing thoroughfares, according to the highways authority.
With 3.7 million new vehicles hitting India’s streets last year, that’s little consolation for truck driver Singh.
Getting Worse
“I’ve been driving for 20 years and every year the traffic gets worse,” he said, as other drivers sat at the cafe eating dal and chapattis and waiting for the jam to disperse.
While India has the second-largest road and rail networks in the world, even on highways -- which account for 2 percent of all roads -- average speeds are 35 kph, compared with 80 kph in the U.S., according to JC Bamford Excavators Ltd.
JC Bamford, which sells its yellow diggers in 150 countries, says it takes at least nine days to move equipment 2,900 kilometers from New Delhi to Trivandrum in South India, said Vipin Sondhi, the local unit’s chief executive officer. The equivalent journey in the U.S. would take four days.
Once exporters finally get their goods to port, there are more delays. The average time taken by ships to unload and load at Indian ports is nearly 96 hours, almost 10 times longer than in Hong Kong, a government estimate showed last year.
“Roads are like the arteries,” said Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda. “If your arteries are clogged, your life is at risk.”
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net.
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”
India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.
The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.
“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”
Cars and Soap
Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. (HUVR) also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.
“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”
Maruti, Godrej Consumer Products Ltd., and Hero MotoCorp Ltd., maker of almost half the motorcycles sold in India, are among hundreds of manufacturers that make their own electricity.
“From the beginning we took the decision to use our own power as the power supplied by the government wasn’t reliable,” said R.C. Bhargava, chairman of Maruti, a unit of Hamamatsu, Japan-based Suzuki Motor Corp., which has made vehicles in India since 1983. “Doing business in India is much costlier.”
Share Discount
The transport delays and power shortages make shares of Indian companies less valuable than those of rivals abroad, said Sadanand Shetty, a Mumbai-based senior fund manager at Taurus Asset Management Co., which manages about $1.3 billion.
“They have to pay a huge cost,” said Shetty. “Indian company shares trade at a discount to competitors overseas.”
Maruti’s estimated price-to-earnings ratio for this fiscal year, a measure of how expensive a stock is within an industry, is 15, compared with 7 for SAIC Motor Corp., China’s biggest automaker, according to data compiled by Bloomberg.
The additional expenses in India add to inflation, limiting the country’s tools to cope with a worsening global economic outlook. The rupee, down 15 percent so far this year, is heading for its second-worst year against the dollar since 1991, when Prime Minister Manmohan Singh, then finance chief, began a shift toward free-market policies.
Higher Inflation
India’s inflation is the highest among the so-called BRIC nations, which include Brazil, Russia and China, with its benchmark gauge rising 9.1 percent in November from a year before. By comparison, China’s rate eased to a 14-month low of 4.2 percent, giving its policy makers more room to support growth as Europe’s debt crisis curbs exports. Russia’s pace was 6.8 percent and Brazil’s 6.6 percent.
The prime minister said in a Dec. 14 interview in New Delhi that “if the international situation doesn’t stand in our way, we will bring down inflation,” predicting it will come down to “no more than 5 or 6 percent.” While international commodity prices have pushed up costs in India, record food production should help ease pressures, he said.
The International Monetary Fund sees India’s consumer-price inflation still outpacing China’s rate by almost 2 percentage points by 2015.
Lasting Disadvantage
“Even if the global economic slowdown provides some relief from inflation in the short term, India will continue to be at a disadvantage until it fixes its problems with power, roads and other infrastructure,” said Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt.
China in 2009 spent an estimated $539 billion on infrastructure, amounting to 10.8 percent of its gross domestic product, compared with $99 billion, or 7.5 percent of GDP, for India, according to Morgan Stanley.
“Look at China, they first put in place all the necessary roads, electricity, power,” said Ravi Sud, chief financial officer of Hero MotoCorp. “That’s the reason they now have faster growth, with manageable levels of inflation. We, on the other hand, are still struggling to take off.”
Singh has pledged to tackle the problem with policies that call for $1 trillion in infrastructure spending between 2012 and 2017.
‘Huge Plans’
“India has huge plans,” said Rajat Nag, managing director-general of the Asian Development Bank. “It’s a question of implementing them. It needs to accelerate the pace of approvals, take care of environmental clearances and issues related to land acquisition. Bottlenecks are a huge drag on the economy.”
Targets to lay more highways and generate more electricity have been repeatedly missed. In the year through March 2011, the National Highways Authority of India built 1,780 kilometers of motorways, about 30 percent less than its target. In the same period, the nation added 9,585 megawatts of power, 34 percent less than forecast.
“The delays have been due to problems in land acquisition, environmental clearances and in some cases poor performance of contractors,” said Manoj Singh, an adviser at the nation’s Planning Commission in New Delhi. “It would be unrealistic to think of matching the U.S. or China in terms of infrastructure. It would take many decades.”
Fitch Ratings changed its outlook for Indian infrastructure projects to negative for 2012, from stable this year, in a report released Dec. 15, citing risks to the credit quality of power projects, airports and toll roads.
Service Gain
India may still reap some reward from the development of industries that don’t rely so heavily on transport networks. Its aggregate share in global commercial services trade will exceed China’s in the next five to six years, driven by information technology, which accounts for about 60 percent of India’s services exports, according to Morgan Stanley.
The country may also get some respite from inflation as a global economic slowdown curbs demand for goods. Exports rose 10.8 percent in October from a year earlier, the least in two years, the Commerce Ministry said Dec. 1. Factory output that month shrank 5.1 percent from a year earlier, the first drop since June 2009, the Central Statistical Office said.
That’s pushed the yield on India’s 10-year government bond close to the level of the one-year note, showing that some investors are betting growth in the country will slow. The Reserve Bank of India in October cut its economic growth forecast to 7.6 percent for the year through March, from 8 percent previously. RBI Governor Duvvuri Subbarao has said his comfort zone for inflation is 4 percent to 6 percent.
Retail Reversal
Prime Minister Singh’s efforts to restrain prices took a blow earlier this month when the government reversed a decision to allow overseas retailers like Wal-Mart Stores Inc. to open supermarkets, after failing to get support from political allies.
Singh and Commerce Minister Anand Sharma have said allowing the investment would create 10 million jobs, and help rein in inflation by reducing the 40 percent of fruit and vegetables that rot before they get to market.
The prime minister vowed in last week’s interview to revive the plan after regional elections next year.
India aims to award projects for 7,300 kilometers of new roads and expressways this fiscal year, and spend 550 billion rupees ($10.4 billion) widening existing thoroughfares, according to the highways authority.
With 3.7 million new vehicles hitting India’s streets last year, that’s little consolation for truck driver Singh.
Getting Worse
“I’ve been driving for 20 years and every year the traffic gets worse,” he said, as other drivers sat at the cafe eating dal and chapattis and waiting for the jam to disperse.
While India has the second-largest road and rail networks in the world, even on highways -- which account for 2 percent of all roads -- average speeds are 35 kph, compared with 80 kph in the U.S., according to JC Bamford Excavators Ltd.
JC Bamford, which sells its yellow diggers in 150 countries, says it takes at least nine days to move equipment 2,900 kilometers from New Delhi to Trivandrum in South India, said Vipin Sondhi, the local unit’s chief executive officer. The equivalent journey in the U.S. would take four days.
Once exporters finally get their goods to port, there are more delays. The average time taken by ships to unload and load at Indian ports is nearly 96 hours, almost 10 times longer than in Hong Kong, a government estimate showed last year.
“Roads are like the arteries,” said Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda. “If your arteries are clogged, your life is at risk.”
To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net.
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net.
®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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