ZHUJI, China — For American business, the United States currency dispute with China is a two-sided coin.
On the tails-we-lose side are companies like New York-based PS Brands, one of the biggest American importers of socks. With the Obama administration pressing China to raise the value of its currency, the cost of Chinese-made socks is likely to rise. So PS Brands’ main supplier here is demanding shorter contracts at higher prices.
“Before, I could price six months out,” Elie Levy, chief executive of PS Brands, said during a recent factory visit here. “Now they only want to price 30 or 40 days out because the dollar could lose value.”
For the heads-we-win side, look to an American company 9,000 miles away, in Irvine, Calif., where the prospect of a weaker dollar is actually good news. There, Staco Systems, a maker of aerospace electronics, has a growth business selling parts to state-owned aviation companies in China. If anything, a stronger Chinese renminbi would make Staco’s products even more attractive to buyers in China.
PS Brands’ problems, contrasted with Staco’s opportunities, make clear why American businesses are far from unified on whether Washington should be waging a currency fight with China.
United States monetary policy has already caused the dollar to drop in value this year against most other major currencies. But the dollar’s value has fallen only modestly against the renminbi. That is because Beijing has kept the renminbi artificially low by pegging it to the dollar — instead of letting it float to its market level, as most other global currencies do.
Beijing’s critics say the artificially low renminbi, by making Chinese exports cheaper than they otherwise might be, has helped China run up its huge trade surplus with the United States and much of the rest of the world.
At the Group of 20 summit meeting in Seoul, South Korea, last week, President Obama chided China on its currency policy, calling for Beijing to “act in a responsible fashion internationally” and saying the undervalued renminbi was “an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world.”
Beijing countered that between 2005 and 2008, when the value of the renminbi rose by about 20 percent against the dollar, it had little braking effect on the soaring United States trade deficit with China. Chinese officials say Washington is simply searching for a scapegoat.
“China will do its best to manage its economy, and never blame others for its own problems,” China’s president, Hu Jintao, said on his way to the Seoul meeting.
Big American multinational manufacturing companies can feel the pinch of dollar-renminbi fluctuations. In many cases, though, they have set up operations in China and elsewhere that let them hedge by doing business in local currencies.
But currency exchange rates are a much bigger factor for the many small and midsize American companies that still manufacture on shore, like Staco. They tend to embrace a dollar policy that would make their export prices lower.
Meanwhile, the American companies most likely to oppose Washington’s currency fight with Beijing are businesses like PS Brands — Wal-Mart would be another good example — that get their goods from China and sell them in the United States. Those companies’ balance sheets are likely to suffer, and American consumers more likely to feel the effect, when the cost goes up on Chinese imports — whether socks, sofas or smartphones.
What often gets lost in the heated rhetoric, though, is that American and Chinese officials actually agree in principle that more balanced trade is healthier for the global economy. Where they diverge is on how fast to get there.
The Obama administration wants fast action because it worries that the growing United States trade deficit will continue to threaten jobs and economic growth. But Chinese officials worry that letting the renminbi rise too quickly would bankrupt coastal factories that price their goods in dollars and that already operate on thin profit margins, destroying tens of millions of jobs.
As a result, Beijing has allowed the renminbi to rise against the dollar only moderately, by about 3 percent this year. China’s critics say it needs to rise by as much as 20 percent more.
The challenges to both sides are evident here in the city of Zhuji, two hours south of Shanghai, where Mr. Levy arrived recently to negotiate the purchase of about $1 million worth of socks.
PS Brand, which had $58 million in revenue last year, is a private company with 35 employees. Its Chinese supplier is Shuangjin Knitting and Textile, which operates a 300,000-square-foot factory here that will produce about 43 million pairs of socks this year. Dealers like PS Brands distribute those socks to customers like Wal-Mart, Adidas and Disney.
On the crisp, autumn day of Mr. Levy’s visit, about 75 workers were busy stitching, sorting and packaging thousands of socks headed for America, including labels featuring the cartoon character Dora the Explorer.
The factory’s boss, a friendly, 41-year-old entrepreneur named Yang Tiefeng, boasts that he has sock manufacturing down to a science. His facility can churn out 5,000 pairs of socks every hour at a cost of about 25 cents a pair, he says, which at current exchange rates still leaves him a tiny profit.
Analysts say those socks retail in the United States for about $2.99, with the difference divided among shippers, middlemen, marketers and the retailer.
But even without the currency fight, the economics of sock-making here are shifting. This year, labor shortages in China’s booming coastal factory towns have pushed up factory wages. And skyrocketing cotton prices, propelled by bad weather in cotton-producing regions, have been an even sharper blow.
Tuesday, November 16, 2010
Kenya in Talks With Reliance, Tatas for Investments, Prime Minister Says
Kenya’s government is in talks with Reliance Industries Ltd., India’s biggest company by market value, and the Tata Group for possible investments in the African country, Prime Minister Raila Odinga said.
“Reliance and Tata groups are interested,” Odinga told Bloomberg-UTV in an interview at the World Economic Forum’s India economic summit in New Delhi today. “We see a new group of Indian multinationals taking interest not only in Kenya, but the rest of Africa.”
Billionaire Mukesh Ambani’s Reliance has $6.5 billion in cash to use in buying energy assets overseas as natural gas output from its biggest deposit in India stagnates. Tata Group Chairman Ratan Tata has made 66 acquisitions in two decades. The group’s revenue was more than $67 billion in the year ended March, according to its website.
Reliance is looking at investing in oil exploration in Kenya, Odinga said.
Manoj Warrier, a spokesman for Reliance, declined to comment. Raman Dhawan, managing director of Tata Africa Holdings, couldn’t immediately be reached at his office in Johannesburg.
Reliance bought three shale-gas assets in the U.S. this year. The Mumbai-based explorer and oil refiner paid $943 million for the three assets and agreed to spend $2.5 billion in future drilling costs on behalf of its partners.
Reliance had 293.5 billion rupees ($6.5 billion) in cash and equivalent and outstanding debt was 682 billion rupees as of Sept. 30, according to an Oct. 30 statement.
Oil Blocks
Cnooc Ltd., China’s biggest offshore energy explorer, has told the Kenyan government it plans to drop licenses to search for oil and gas in two Kenyan blocks by December, Mines and Energy Ministry Permanent Secretary Patrick Nyoike said Oct. 21. Cnooc is interested in working with Tullow Oil Plc and Africa Oil Corp. to explore five other blocks, Nyoike said then.
Kenya has four sedimentary basins that have been divided into 38 exploration blocks, Nyoike said in July. About 24 of the blocks are being explored, he said.
Reliance, owner of the world’s biggest refining complex, bought fuel retailer Gulf Africa Petroleum Corp. to enter the African market in September 2007. Gulf Africa Petroleum retails fuel in Tanzania, Uganda and Kenya. It owns storage tanks and depots in east and central Africa, Reliance said at the time.
The Tata Group’s businesses in Africa include automobiles, phone services and a hotel.
“Reliance and Tata groups are interested,” Odinga told Bloomberg-UTV in an interview at the World Economic Forum’s India economic summit in New Delhi today. “We see a new group of Indian multinationals taking interest not only in Kenya, but the rest of Africa.”
Billionaire Mukesh Ambani’s Reliance has $6.5 billion in cash to use in buying energy assets overseas as natural gas output from its biggest deposit in India stagnates. Tata Group Chairman Ratan Tata has made 66 acquisitions in two decades. The group’s revenue was more than $67 billion in the year ended March, according to its website.
Reliance is looking at investing in oil exploration in Kenya, Odinga said.
Manoj Warrier, a spokesman for Reliance, declined to comment. Raman Dhawan, managing director of Tata Africa Holdings, couldn’t immediately be reached at his office in Johannesburg.
Reliance bought three shale-gas assets in the U.S. this year. The Mumbai-based explorer and oil refiner paid $943 million for the three assets and agreed to spend $2.5 billion in future drilling costs on behalf of its partners.
Reliance had 293.5 billion rupees ($6.5 billion) in cash and equivalent and outstanding debt was 682 billion rupees as of Sept. 30, according to an Oct. 30 statement.
Oil Blocks
Cnooc Ltd., China’s biggest offshore energy explorer, has told the Kenyan government it plans to drop licenses to search for oil and gas in two Kenyan blocks by December, Mines and Energy Ministry Permanent Secretary Patrick Nyoike said Oct. 21. Cnooc is interested in working with Tullow Oil Plc and Africa Oil Corp. to explore five other blocks, Nyoike said then.
Kenya has four sedimentary basins that have been divided into 38 exploration blocks, Nyoike said in July. About 24 of the blocks are being explored, he said.
Reliance, owner of the world’s biggest refining complex, bought fuel retailer Gulf Africa Petroleum Corp. to enter the African market in September 2007. Gulf Africa Petroleum retails fuel in Tanzania, Uganda and Kenya. It owns storage tanks and depots in east and central Africa, Reliance said at the time.
The Tata Group’s businesses in Africa include automobiles, phone services and a hotel.
India Auditor Says State Lost $31 Billion Rupees in Mobile Airwaves Sale
India’s federal treasury may have lost as much as 1.4 trillion rupees ($31 billion) in revenue after telecommunications airwaves were sold below market rates two years ago, the government’s auditor said.
The Indian government collected only 123.9 billion rupees from the sale of the so-called second-generation wireless spectrum to companies, the Comptroller and Auditor General of India said in a report submitted to parliament in New Delhi today. The airwaves were sold in 2008.
In contrast, India raised 677.2 billion rupees selling third-generation wireless airwaves in May. Phone companies in Europe paid more than $100 billion for similar high-speed spectrum in auctions across the continent in 2000.
Andimuthu Raja, resigned on Nov. 14 as the nation’s telecommunications minister after a year-long investigation into the sale of the wireless spectrum. The Central Bureau of Investigation has been examining the role Raja and the Ministry of Communications had in the pricing of the permits since October last year while the Supreme Court has been hearing public interest petitions on the subject.
The auditor calculated the maximum estimated loss based on the prices at which the third-generation airwaves were sold in May. Based on another model, the under-pricing of 2G spectrum led to a loss of 535.2 billion rupees, according to the report.
‘Jump the Queue’
The department of telecommunications failed to consider applications on a “first come, first serve” basis, the auditor said, allowing some applicants to “jump the queue.” The process by which the department issued the permits, called Universal Access Service, or UAS, licenses, “lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner,” according to the report.
The department issued 122 new licenses to use 2G spectrum in 2008, according to the report. Eighty-five of the licenses were given to “ineligible” recipients.
Companies including Unitech Ltd., Tata Teleservices Ltd., Shyam Telelink Ltd., now known as Sistema Shyam Teleservices Ltd., and Swan Telecom Ltd., now known as Etisalat DB Telecom Pvt., sold stakes in their wireless ventures at significant premiums to the price they paid for spectrum, the auditor said. Telenor ASA spent 61.2 billion rupees for buying a 67.25 percent stake in its venture with Unitech, the auditor said.
‘Fraudulent Means’
“These companies, created barely months ago, deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means for getting UAS licenses and thereby access to spectrum,” according to the report. Owners of the licenses, “obtained at unbelievably low price, have in turn sold significant stakes in their companies to Indian or foreign companies at high premium.”
The auditor’s report is “based on incorrect footings” and is “erroneous,” Shahid Balwa, Mumbai-based vice chairman of Etisalat DB, said in an e-mail today. “We shall be putting out a detailed explanation to the concerned authorities, which more than adequately clarifies the company’s position.”
Rajeev Narayan, a spokesman for Mumbai-based Tata Teleservices, declined to comment. Tanuja Kehar, a spokeswoman for New Delhi-based Unitech, and Viraj Chouhan, a Gurgaon, India-based spokesman for Sistema Shyam, didn’t immediately respond to e-mails seeking comment.
The Indian government collected only 123.9 billion rupees from the sale of the so-called second-generation wireless spectrum to companies, the Comptroller and Auditor General of India said in a report submitted to parliament in New Delhi today. The airwaves were sold in 2008.
In contrast, India raised 677.2 billion rupees selling third-generation wireless airwaves in May. Phone companies in Europe paid more than $100 billion for similar high-speed spectrum in auctions across the continent in 2000.
Andimuthu Raja, resigned on Nov. 14 as the nation’s telecommunications minister after a year-long investigation into the sale of the wireless spectrum. The Central Bureau of Investigation has been examining the role Raja and the Ministry of Communications had in the pricing of the permits since October last year while the Supreme Court has been hearing public interest petitions on the subject.
The auditor calculated the maximum estimated loss based on the prices at which the third-generation airwaves were sold in May. Based on another model, the under-pricing of 2G spectrum led to a loss of 535.2 billion rupees, according to the report.
‘Jump the Queue’
The department of telecommunications failed to consider applications on a “first come, first serve” basis, the auditor said, allowing some applicants to “jump the queue.” The process by which the department issued the permits, called Universal Access Service, or UAS, licenses, “lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner,” according to the report.
The department issued 122 new licenses to use 2G spectrum in 2008, according to the report. Eighty-five of the licenses were given to “ineligible” recipients.
Companies including Unitech Ltd., Tata Teleservices Ltd., Shyam Telelink Ltd., now known as Sistema Shyam Teleservices Ltd., and Swan Telecom Ltd., now known as Etisalat DB Telecom Pvt., sold stakes in their wireless ventures at significant premiums to the price they paid for spectrum, the auditor said. Telenor ASA spent 61.2 billion rupees for buying a 67.25 percent stake in its venture with Unitech, the auditor said.
‘Fraudulent Means’
“These companies, created barely months ago, deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means for getting UAS licenses and thereby access to spectrum,” according to the report. Owners of the licenses, “obtained at unbelievably low price, have in turn sold significant stakes in their companies to Indian or foreign companies at high premium.”
The auditor’s report is “based on incorrect footings” and is “erroneous,” Shahid Balwa, Mumbai-based vice chairman of Etisalat DB, said in an e-mail today. “We shall be putting out a detailed explanation to the concerned authorities, which more than adequately clarifies the company’s position.”
Rajeev Narayan, a spokesman for Mumbai-based Tata Teleservices, declined to comment. Tanuja Kehar, a spokeswoman for New Delhi-based Unitech, and Viraj Chouhan, a Gurgaon, India-based spokesman for Sistema Shyam, didn’t immediately respond to e-mails seeking comment.
Indian microlender makes regulation plea
Vikram Akula, founder of India’s largest microcredit company, has called for “enlightened regulation” of the microfinance industry to weed out “rogue actors” without pushing other players to collapse.
“Do not destroy an entire industry because of the actions of a few rogue players,” Mr Akula, who founded SKS Microfinance, said in New Delhi on Tuesday at the World Economic Forum. “There is a right way to do microfinance, and a majority do practise ethical lending and have been doing so for decades.”
Mr Akula, the most visible face of India’s microfinance industry since his company’s August initial public offering raised $350m dollars, conceded that “occasionally, you do get rogue players and errant practices”. But he said such players should be held “fully accountable” without others being punished others in the process
His appeal comes as India’s for-profit microfinance industry has warned it is being pushed to the brink of collapse by a political and regulatory backlash in the southern Andhra Pradesh state, where officials have accused companies of “usurious” interest rates and “coercive” debt collection tactics.
The industry has denied wrongdoing but says some traditional moneylenders have rebranded themselves as microfinance institutions, adopted their group lending practices and are sullying the industry’s image.
“Microfinance in India, or at least in Andhra Pradesh, is in the midst of a near-death experience,” Sam Daley Harris, director of the Microcredit Summit Campaign, said at a conference in New Delhi this week.
India’s microfinance industry has around $6.7bn in outstanding loans – at interest rates of 27 to 36 per cent – to some 30m small rural and urban borrowers. But the sector’s once enviable repayment rates of 98 per cent have plummeted since mid-October, when state authorities abruptly adopted new rules requiring microlenders dramatically to change the way they operate.
Besides imposing onerous registration procedures on companies, authorities have banned lenders from collecting on their outstanding debts every week – standard practice in the international microfinance industry – and instead restricted collections to once a month.
At the same time, microcredit companies say their loan officers are being actively obstructed from meeting clients and collecting in debts by local officials, and political activists, who have spread rumours of an imminent microfinance debt waiver and are encouraging borrowers to withhold repayment.
Industry executives believe the Andhra Pradesh moves have been deliberately designed to inflict serious damage on what had been a fast-growing industry, after the SKS IPO turned the public spotlight on the huge profits being earned in an industry ostensibly intended to aid the poor.
“The ordinance was not designed just to reform,” Alok Prasad, chief executive of India’s Microfinance Institutions Network, said of the Andhra Pradesh ordinance. “It was designed to hurt. It was designed to wound.”
“Do not destroy an entire industry because of the actions of a few rogue players,” Mr Akula, who founded SKS Microfinance, said in New Delhi on Tuesday at the World Economic Forum. “There is a right way to do microfinance, and a majority do practise ethical lending and have been doing so for decades.”
Mr Akula, the most visible face of India’s microfinance industry since his company’s August initial public offering raised $350m dollars, conceded that “occasionally, you do get rogue players and errant practices”. But he said such players should be held “fully accountable” without others being punished others in the process
His appeal comes as India’s for-profit microfinance industry has warned it is being pushed to the brink of collapse by a political and regulatory backlash in the southern Andhra Pradesh state, where officials have accused companies of “usurious” interest rates and “coercive” debt collection tactics.
The industry has denied wrongdoing but says some traditional moneylenders have rebranded themselves as microfinance institutions, adopted their group lending practices and are sullying the industry’s image.
“Microfinance in India, or at least in Andhra Pradesh, is in the midst of a near-death experience,” Sam Daley Harris, director of the Microcredit Summit Campaign, said at a conference in New Delhi this week.
India’s microfinance industry has around $6.7bn in outstanding loans – at interest rates of 27 to 36 per cent – to some 30m small rural and urban borrowers. But the sector’s once enviable repayment rates of 98 per cent have plummeted since mid-October, when state authorities abruptly adopted new rules requiring microlenders dramatically to change the way they operate.
Besides imposing onerous registration procedures on companies, authorities have banned lenders from collecting on their outstanding debts every week – standard practice in the international microfinance industry – and instead restricted collections to once a month.
At the same time, microcredit companies say their loan officers are being actively obstructed from meeting clients and collecting in debts by local officials, and political activists, who have spread rumours of an imminent microfinance debt waiver and are encouraging borrowers to withhold repayment.
Industry executives believe the Andhra Pradesh moves have been deliberately designed to inflict serious damage on what had been a fast-growing industry, after the SKS IPO turned the public spotlight on the huge profits being earned in an industry ostensibly intended to aid the poor.
“The ordinance was not designed just to reform,” Alok Prasad, chief executive of India’s Microfinance Institutions Network, said of the Andhra Pradesh ordinance. “It was designed to hurt. It was designed to wound.”
Sunday, November 14, 2010
Religare eyes emerging markets deals
Religare Capital Markets, backed by the Indian billionaire Singh family, is planning acquisitions in four developing countries over the next six to 12 months as it seeks to become a global emerging markets investment bank.
The move by Religare comes as homegrown investment banks in emerging markets are seeking to build overseas networks to serve their corporate clients, which are increasingly looking for acquisitions abroad.
Religare, which has already formed a joint venture in Turkey and acquired a presence in Sri Lanka, Singapore, Hong Kong, London and New York, is looking to buy investment banking or broking operations in Brazil, the Philippines, Indonesia and South Africa.
“We are seeking to become India’s first global emerging markets investment bank,” said Tarun Kataria, chief executive of Religare Capital Markets India.
Religare joins rivals in other emerging markets, such as Renaissance Capital in Russia and BTG Pactual in Brazil, which are also acquiring a presence in other fast-growing markets.
Religare could not disclose the size of the intended acquisitions but Mr Kataria said the group has invested $100m and plans to invest a total of $400m within the next 12-18 months.
Religare Capital Markets’ controlling shareholder, Religare Enterprises, is majority owned by billionaire brothers, Malvinder Singh and Shivinder Mohan Singh.
The Singhs raised $2bn from the sale of their stake in India’s biggest generic drugs maker, Ranbaxy Laboratories, to Japan’s Daichi Sankyo in 2008.
Religare in September agreed to acquire a 50 per cent stake in a Sri Lankan brokerage, Bartleet Mallory Stock Brokers, and in August bought the US and UK units of South Africa’s Barnard Jacobs Mellet for $7.3m.
In June, it bought Aviate Global (Asia), an equities business with offices in Hong Kong, Singapore and Melbourne, Australia and the same month formed a strategic alliance with Guaranti Securities in Turkey.
Religare has acquired 290 institutional investor clients from the acquisitions, Mr Kataria said.
The group will offer services ranging from mergers and acquisition advisory work to share offerings, and will target deals worth $300m and above.
India will remain the group’s homebase. It claims to have the largest retail broking market share in India.
Religare is not the only Indian homegrown bank looking to build an international network.
Raamdeo Agrawal, director of financial services group Motilal Oswal, said that Indian merchant banks with offices in emerging markets would be better positioned to win mandates from Indian companies.
“On a cross-border deal, an Indian corporate will always prefer to have at least one Indian investment banker advising him … it’s a cultural matter,” said Mr Agrawal.
In the last five years homegrown investment banks have been competing with global banks that have expanded their advisory operations in India.
Indian investment banks that have been unable to expand abroad through acquisitions have started to set up joint ventures and alliances with counterparts in other emerging economies.
“It is much more convenient to set up a partnership with an investment bank in Africa and South America than opening up an office there,” said Rashesh Shah of Edelweiss, an Indian financial services group.
The move by Religare comes as homegrown investment banks in emerging markets are seeking to build overseas networks to serve their corporate clients, which are increasingly looking for acquisitions abroad.
Religare, which has already formed a joint venture in Turkey and acquired a presence in Sri Lanka, Singapore, Hong Kong, London and New York, is looking to buy investment banking or broking operations in Brazil, the Philippines, Indonesia and South Africa.
“We are seeking to become India’s first global emerging markets investment bank,” said Tarun Kataria, chief executive of Religare Capital Markets India.
Religare joins rivals in other emerging markets, such as Renaissance Capital in Russia and BTG Pactual in Brazil, which are also acquiring a presence in other fast-growing markets.
Religare could not disclose the size of the intended acquisitions but Mr Kataria said the group has invested $100m and plans to invest a total of $400m within the next 12-18 months.
Religare Capital Markets’ controlling shareholder, Religare Enterprises, is majority owned by billionaire brothers, Malvinder Singh and Shivinder Mohan Singh.
The Singhs raised $2bn from the sale of their stake in India’s biggest generic drugs maker, Ranbaxy Laboratories, to Japan’s Daichi Sankyo in 2008.
Religare in September agreed to acquire a 50 per cent stake in a Sri Lankan brokerage, Bartleet Mallory Stock Brokers, and in August bought the US and UK units of South Africa’s Barnard Jacobs Mellet for $7.3m.
In June, it bought Aviate Global (Asia), an equities business with offices in Hong Kong, Singapore and Melbourne, Australia and the same month formed a strategic alliance with Guaranti Securities in Turkey.
Religare has acquired 290 institutional investor clients from the acquisitions, Mr Kataria said.
The group will offer services ranging from mergers and acquisition advisory work to share offerings, and will target deals worth $300m and above.
India will remain the group’s homebase. It claims to have the largest retail broking market share in India.
Religare is not the only Indian homegrown bank looking to build an international network.
Raamdeo Agrawal, director of financial services group Motilal Oswal, said that Indian merchant banks with offices in emerging markets would be better positioned to win mandates from Indian companies.
“On a cross-border deal, an Indian corporate will always prefer to have at least one Indian investment banker advising him … it’s a cultural matter,” said Mr Agrawal.
In the last five years homegrown investment banks have been competing with global banks that have expanded their advisory operations in India.
Indian investment banks that have been unable to expand abroad through acquisitions have started to set up joint ventures and alliances with counterparts in other emerging economies.
“It is much more convenient to set up a partnership with an investment bank in Africa and South America than opening up an office there,” said Rashesh Shah of Edelweiss, an Indian financial services group.
Bonds Beat BRIC Rivals as Inflation Shows Signs of Slowing: India Credit
Indian bonds outperformed those of the largest emerging nations in the past month, with the biggest decline in yields relative to Treasuries among BRIC nations, on signs inflation is slowing.
A government report today will show the wholesale-price index rose 8.5 percent in October, the least since December, compared with 8.6 percent in September, according to the median estimate of economists in a Bloomberg survey. Yields on India’s 10-year bonds dropped relative to U.S. treasuries more than Brazil’s, while similar rates in Russia and China jumped.
Central bank Governor Duvvuri Subbarao’s decision to raise interest rates six times this year is boosting confidence he will tame benchmark inflation that is about twice the rate in Brazil and China and more than 2 percentage points above Russia’s. Nomura Holdings Inc. forecast India’s benchmark yield will drop 28 basis points to 7.80 percent by March after data last week showed slowing factory output and food-price gains.
“We expect the RBI to pause in its rate hikes in the immediate future given the softening trend in inflation and factory output,” said Sonal Varma, a Mumbai-based economist at Nomura. “It is prudent for the RBI to take stock of previous policy actions.”
Benchmark 10-year notes were little changed on Nov. 12 at 8.08 percent. The rate is 531 basis points, or 5.31 percentage points, more than similar-maturity U.S. Treasuries, down from 558 a month earlier, according to data compiled by Bloomberg. The gap for Brazil’s 10-year yields narrowed one basis point, while the spread widened three points in Russia and 16 in China during the same period. Brazil, Russia, India and China make up the so-called BRIC markets of the largest emerging nations.
Industrial Output
Growth in industrial production slowed to 4.4 percent in September from this year’s high of 16.8 percent in January, the government said on Nov. 12. The previous day, Commerce Ministry data showed food inflation slowed to a one-year low of 12.3 percent in the week to Oct. 30.
“Given the deceleration in factory output, we think the RBI is likely to hold rates,” Jay Shankar, a Mumbai-based chief economist at Religare Capital Markets Ltd., said in an interview on Nov. 12. “We were earlier expecting a 25-basis point increase by March. The chances of that have diminished after the deceleration in the key economic data.”
He forecasts the benchmark yield will drop to 7.90 percent by January. The Reserve Bank predicted on Nov. 2 that benchmark wholesale-price inflation may slow to 5.5 percent by the end of March.
Bond Volatility
India uses the wholesale-price index as a benchmark for measuring inflation. The consumer-price inflation rate for industrial workers quickened 9.82 percent in September. In contrast, consumer price inflation rate rose 5.2 percent in Brazil, 7.5 percent in Russia and 4.4 percent in China.
The government raised $2.5 billion, selling seven-, 10- and 30-year bonds at maximum yields of 7.99 percent, 8.10 percent and 8.49 percent at an auction on Nov. 12.
India’s government bonds underperformed earlier this year as average inflation in the first nine months jumped sevenfold to 9.7 percent. The securities returned 3.8 percent this year, the third-worst performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc.
Narrowing swings in the bond yields of Asia’s third-biggest economy signaled a smaller potential for losses. A measure of the 10-year rate’s 30-day historical volatility has declined to 7.8 percent from 19.1 percent in May, data compiled by Bloomberg show. A similar gauge was at 17 percent in Brazil, 12 percent in Russia and 19.3 percent in China.
Treasury Yields
The cost of fixing rates on money for a year in India’s interest-rate swap market has declined 7 basis points from a two-year high of 6.83 percent reached on Oct. 28, data compiled by Bloomberg show.
The rupee appreciated 3.8 percent this year as the Reserve Bank raised the benchmark repurchase rate 150 basis points to 6.25 percent, attracting fund inflows into the nation. The currency dropped 1.1 percent on Nov. 12 to 44.805 per dollar after production growth slowed and on concern the Group of 20 nations will be unable to revive global growth and that China’s central bank may raise interest rates.
Yields in the U.S., the world’s biggest economy, have also climbed on speculation efforts by the Federal Reserve to spur the economy will lead to faster inflation. The benchmark 10-year treasury yield was at 2.79 percent on Nov. 12, the highest since Sept. 10.
Bank Holdings
The Reserve Bank said on Nov. 2 that increases in global commodity-prices pose a risk to its inflation outlook. Record share sales in India have also starved the bond market of funds, raising overnight borrowing rates to an average 6.3 percent this quarter from 5.4 percent in the previous three months.
Banks, the biggest buyers of government debt, raised their holdings by 1.8 percent in the two weeks to Oct. 22, the most since April, before a cash shortage in the last week of the month prompted them to cut their positions, Reserve Bank of India data show.
Factory-output and India’s food inflation data “don’t really matter for investors as long as the liquidity shortage continues,” Prasanna Ananthasubramaniam, the Mumbai-based chief economist at ICICI Securities Primary Dealership Ltd., said in an interview on Nov. 12. “Liquidity is a bigger concern now.”
Cash Crunch
The Reserve Bank has increased daily lending to banks to alleviate the cash squeeze. The central bank lent 1.2 trillion rupees ($27 billion) to local lenders Nov. 11, an all-time high.
The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has decreased 70 basis points to 169 from a one-year high reached in May, 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.
“The industrial-output data indicate further hikes may not be necessary,” Roy Paul, deputy general manager at Mumbai-based Federal Bank Ltd., said in an interview on Nov. 12. “It’s a good level to enter bonds in the backdrop of a likely pause.” He predicts the 10-year yield will drop to 7.60 percent by March.
A government report today will show the wholesale-price index rose 8.5 percent in October, the least since December, compared with 8.6 percent in September, according to the median estimate of economists in a Bloomberg survey. Yields on India’s 10-year bonds dropped relative to U.S. treasuries more than Brazil’s, while similar rates in Russia and China jumped.
Central bank Governor Duvvuri Subbarao’s decision to raise interest rates six times this year is boosting confidence he will tame benchmark inflation that is about twice the rate in Brazil and China and more than 2 percentage points above Russia’s. Nomura Holdings Inc. forecast India’s benchmark yield will drop 28 basis points to 7.80 percent by March after data last week showed slowing factory output and food-price gains.
“We expect the RBI to pause in its rate hikes in the immediate future given the softening trend in inflation and factory output,” said Sonal Varma, a Mumbai-based economist at Nomura. “It is prudent for the RBI to take stock of previous policy actions.”
Benchmark 10-year notes were little changed on Nov. 12 at 8.08 percent. The rate is 531 basis points, or 5.31 percentage points, more than similar-maturity U.S. Treasuries, down from 558 a month earlier, according to data compiled by Bloomberg. The gap for Brazil’s 10-year yields narrowed one basis point, while the spread widened three points in Russia and 16 in China during the same period. Brazil, Russia, India and China make up the so-called BRIC markets of the largest emerging nations.
Industrial Output
Growth in industrial production slowed to 4.4 percent in September from this year’s high of 16.8 percent in January, the government said on Nov. 12. The previous day, Commerce Ministry data showed food inflation slowed to a one-year low of 12.3 percent in the week to Oct. 30.
“Given the deceleration in factory output, we think the RBI is likely to hold rates,” Jay Shankar, a Mumbai-based chief economist at Religare Capital Markets Ltd., said in an interview on Nov. 12. “We were earlier expecting a 25-basis point increase by March. The chances of that have diminished after the deceleration in the key economic data.”
He forecasts the benchmark yield will drop to 7.90 percent by January. The Reserve Bank predicted on Nov. 2 that benchmark wholesale-price inflation may slow to 5.5 percent by the end of March.
Bond Volatility
India uses the wholesale-price index as a benchmark for measuring inflation. The consumer-price inflation rate for industrial workers quickened 9.82 percent in September. In contrast, consumer price inflation rate rose 5.2 percent in Brazil, 7.5 percent in Russia and 4.4 percent in China.
The government raised $2.5 billion, selling seven-, 10- and 30-year bonds at maximum yields of 7.99 percent, 8.10 percent and 8.49 percent at an auction on Nov. 12.
India’s government bonds underperformed earlier this year as average inflation in the first nine months jumped sevenfold to 9.7 percent. The securities returned 3.8 percent this year, the third-worst performance among 10 Asian local-currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc.
Narrowing swings in the bond yields of Asia’s third-biggest economy signaled a smaller potential for losses. A measure of the 10-year rate’s 30-day historical volatility has declined to 7.8 percent from 19.1 percent in May, data compiled by Bloomberg show. A similar gauge was at 17 percent in Brazil, 12 percent in Russia and 19.3 percent in China.
Treasury Yields
The cost of fixing rates on money for a year in India’s interest-rate swap market has declined 7 basis points from a two-year high of 6.83 percent reached on Oct. 28, data compiled by Bloomberg show.
The rupee appreciated 3.8 percent this year as the Reserve Bank raised the benchmark repurchase rate 150 basis points to 6.25 percent, attracting fund inflows into the nation. The currency dropped 1.1 percent on Nov. 12 to 44.805 per dollar after production growth slowed and on concern the Group of 20 nations will be unable to revive global growth and that China’s central bank may raise interest rates.
Yields in the U.S., the world’s biggest economy, have also climbed on speculation efforts by the Federal Reserve to spur the economy will lead to faster inflation. The benchmark 10-year treasury yield was at 2.79 percent on Nov. 12, the highest since Sept. 10.
Bank Holdings
The Reserve Bank said on Nov. 2 that increases in global commodity-prices pose a risk to its inflation outlook. Record share sales in India have also starved the bond market of funds, raising overnight borrowing rates to an average 6.3 percent this quarter from 5.4 percent in the previous three months.
Banks, the biggest buyers of government debt, raised their holdings by 1.8 percent in the two weeks to Oct. 22, the most since April, before a cash shortage in the last week of the month prompted them to cut their positions, Reserve Bank of India data show.
Factory-output and India’s food inflation data “don’t really matter for investors as long as the liquidity shortage continues,” Prasanna Ananthasubramaniam, the Mumbai-based chief economist at ICICI Securities Primary Dealership Ltd., said in an interview on Nov. 12. “Liquidity is a bigger concern now.”
Cash Crunch
The Reserve Bank has increased daily lending to banks to alleviate the cash squeeze. The central bank lent 1.2 trillion rupees ($27 billion) to local lenders Nov. 11, an all-time high.
The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, has decreased 70 basis points to 169 from a one-year high reached in May, 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.
“The industrial-output data indicate further hikes may not be necessary,” Roy Paul, deputy general manager at Mumbai-based Federal Bank Ltd., said in an interview on Nov. 12. “It’s a good level to enter bonds in the backdrop of a likely pause.” He predicts the 10-year yield will drop to 7.60 percent by March.
Under Pressure Over Bailout, Dublin Defends Its Finances
BRUSSELS — European ministers worked over the weekend on a financial rescue plan for Ireland, as pressure mounted on Dublin to seek a bailout as the best means of preventing the markets from spreading turbulence to other European countries, officials said on Sunday.
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Aidan Crawley/Bloomberg News
Dublin is hoping to reassure markets that it can avoid a bailout by winning formal European Union approval for its bailout of Anglo Irish Banks.
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The Irish government continued to insist that it did not need a bailout, arguing that it could present a credible austerity budget next month that would satisfy investors, and that it had enough money to finance its operations through early next year.
But analysts and investors, as well as some European officials, say the government’s plan needs to be buttressed by a promise of outside funding to counter the jumpiness in the markets, which have pushed interest rates on Irish bonds to record highs.
“There is a risk of a self-fulfilling prophecy,” a European diplomat said, speaking on the condition of anonymity because of the sensitivity of the issue. “Even a denial is seen as some sort of affirmation that there is something to deny.”
The push to shore up Irish finances reflects the desire of some officials to get ahead of a problem that could not only undermine Dublin’s recovery efforts but also threaten other weak economies in Europe like Portugal and Spain. Last spring, when Greece teetered on the brink of default, a series of reassurances by the European Union failed to calm investor anxiety, and a huge bailout fund had to be arranged at the last minute to stabilize Greece and relieve pressure on the euro.
On Friday, the storm in the markets was briefly calmed when five European ministers at the Group of 20 summit in Seoul issued supportive statements and Ireland’s finance minister, Brian Lenihan, reaffirmed the country’s resolve. But European officials are concerned that more needs to be done before Ireland presents its next budget, scheduled for Dec. 7.
The reaction of the bond markets on Monday is the next test for Ireland. Officials said they were preparing a contingency plan in case the markets moved sharply against the country.
Preliminary talks on a rescue package had already taken place. Discussions involving European Union ministers and senior officials continued on Sunday, said one official involved in the debate. But by early Sunday evening, diplomats said, there were still no plans for any formal teleconference between the finance ministers of the 16 countries that use the euro.
Officials in Brussels and Dublin said that Ireland had not made any formal application for a loan and that without such an application, no bailout could be approved or executed.
According to a report by Barclays Capital, the European Union and the International Monetary Fund would need to loan 80 billion to 85 billion euros, or $109 billion to $116 billion, to satisfy Ireland’s sovereign funding needs and to create an added buffer to help recapitalize its failed banks.
The “extreme tension that has been prevailing in the financial markets, especially concerning the ability of Ireland to achieve a sustainable fiscal path by going it alone,” meant that recourse to European Union loans “would, in our view, represent a sensible outturn,” Julian Callow and Antonio Garcia Pascual of Barclays Capital wrote in a research note on Friday evening.
Finance officials are scheduled to meet on Tuesday and Wednesday to discuss the Irish situation.
Any Irish bailout would be a delicate matter for Germany, which strongly resisted the bailout of Greece and has been pushing to overhaul the current mechanism for European rescues to ensure that private investors help foot the bill of any sovereign defaults. German officials, however, may be hoping that Ireland accepts the bailout sooner rather than later to soothe jittery debt markets and ensure stability of the euro and, in the longer term, the growth prospects of the European Union.
The first of any such payments to Ireland would come from a pot of money totaling 60 billion euros that is guaranteed by the union’s budget and set up to provide rapid assistance to countries in “acute difficulties,” one European official said. The official spoke on the condition of anonymity because of the delicacy of the situation and would not speculate on how much money Ireland might need over all.
Any additional loans would have to come from a much larger pool of money guaranteed by the euro zone nations. That pool totals 440 billion euros, the official said. Reaching such an agreement on using those funds might prove harder, as governments still are debating how a permanent loan system should work. It also could take up to four weeks to draw up a support program using that pool and could require more scrutiny from the International Monetary Fund.
The two pools of funding were set up in May after the bailout of Greece. But the official stressed that Ireland was a very different case.
Whereas Greece’s rescue came after years of concealing the true state of its finances, Ireland has a much stronger track record in economic management. That means it was still possible that Ireland could steady the markets by imposing tough austerity measures.
While Ireland must submit its budget by Dec. 7, it is rushing to prepare a four-year plan that will show how it plans to cut its current deficit from 32 percent of gross domestic product to 3 percent by 2014.
That strategy will include another round of spending cuts and is likely to spark further unrest from a citizenry that is suffering from a third consecutive year of negative growth in the economy.
The Irish government is extremely reluctant to seek a bailout, analysts say, because of the stigma associated with applying for aid and the risk to its political standing.
The Fianna Fail Party leads a shaky coalition that holds only a thin majority in Parliament and could be forced to call early elections next year.
Dublin is also hoping to reassure markets that it can avoid a bailout by winning approval from the European Union for its bailout of Anglo Irish Bank.
The European Commission, the executive arm of the union, still needs to determine whether the bank bailout falls within European state aid rules. The commission is considering whether to approve a 6.4 billion euro portion of the bailout of Allied Irish and to agree to the overall restructuring plan.
Enlarge This Image
Aidan Crawley/Bloomberg News
Dublin is hoping to reassure markets that it can avoid a bailout by winning formal European Union approval for its bailout of Anglo Irish Banks.
Add to Portfolio
Barclays PLC
Go to your Portfolio »
The Irish government continued to insist that it did not need a bailout, arguing that it could present a credible austerity budget next month that would satisfy investors, and that it had enough money to finance its operations through early next year.
But analysts and investors, as well as some European officials, say the government’s plan needs to be buttressed by a promise of outside funding to counter the jumpiness in the markets, which have pushed interest rates on Irish bonds to record highs.
“There is a risk of a self-fulfilling prophecy,” a European diplomat said, speaking on the condition of anonymity because of the sensitivity of the issue. “Even a denial is seen as some sort of affirmation that there is something to deny.”
The push to shore up Irish finances reflects the desire of some officials to get ahead of a problem that could not only undermine Dublin’s recovery efforts but also threaten other weak economies in Europe like Portugal and Spain. Last spring, when Greece teetered on the brink of default, a series of reassurances by the European Union failed to calm investor anxiety, and a huge bailout fund had to be arranged at the last minute to stabilize Greece and relieve pressure on the euro.
On Friday, the storm in the markets was briefly calmed when five European ministers at the Group of 20 summit in Seoul issued supportive statements and Ireland’s finance minister, Brian Lenihan, reaffirmed the country’s resolve. But European officials are concerned that more needs to be done before Ireland presents its next budget, scheduled for Dec. 7.
The reaction of the bond markets on Monday is the next test for Ireland. Officials said they were preparing a contingency plan in case the markets moved sharply against the country.
Preliminary talks on a rescue package had already taken place. Discussions involving European Union ministers and senior officials continued on Sunday, said one official involved in the debate. But by early Sunday evening, diplomats said, there were still no plans for any formal teleconference between the finance ministers of the 16 countries that use the euro.
Officials in Brussels and Dublin said that Ireland had not made any formal application for a loan and that without such an application, no bailout could be approved or executed.
According to a report by Barclays Capital, the European Union and the International Monetary Fund would need to loan 80 billion to 85 billion euros, or $109 billion to $116 billion, to satisfy Ireland’s sovereign funding needs and to create an added buffer to help recapitalize its failed banks.
The “extreme tension that has been prevailing in the financial markets, especially concerning the ability of Ireland to achieve a sustainable fiscal path by going it alone,” meant that recourse to European Union loans “would, in our view, represent a sensible outturn,” Julian Callow and Antonio Garcia Pascual of Barclays Capital wrote in a research note on Friday evening.
Finance officials are scheduled to meet on Tuesday and Wednesday to discuss the Irish situation.
Any Irish bailout would be a delicate matter for Germany, which strongly resisted the bailout of Greece and has been pushing to overhaul the current mechanism for European rescues to ensure that private investors help foot the bill of any sovereign defaults. German officials, however, may be hoping that Ireland accepts the bailout sooner rather than later to soothe jittery debt markets and ensure stability of the euro and, in the longer term, the growth prospects of the European Union.
The first of any such payments to Ireland would come from a pot of money totaling 60 billion euros that is guaranteed by the union’s budget and set up to provide rapid assistance to countries in “acute difficulties,” one European official said. The official spoke on the condition of anonymity because of the delicacy of the situation and would not speculate on how much money Ireland might need over all.
Any additional loans would have to come from a much larger pool of money guaranteed by the euro zone nations. That pool totals 440 billion euros, the official said. Reaching such an agreement on using those funds might prove harder, as governments still are debating how a permanent loan system should work. It also could take up to four weeks to draw up a support program using that pool and could require more scrutiny from the International Monetary Fund.
The two pools of funding were set up in May after the bailout of Greece. But the official stressed that Ireland was a very different case.
Whereas Greece’s rescue came after years of concealing the true state of its finances, Ireland has a much stronger track record in economic management. That means it was still possible that Ireland could steady the markets by imposing tough austerity measures.
While Ireland must submit its budget by Dec. 7, it is rushing to prepare a four-year plan that will show how it plans to cut its current deficit from 32 percent of gross domestic product to 3 percent by 2014.
That strategy will include another round of spending cuts and is likely to spark further unrest from a citizenry that is suffering from a third consecutive year of negative growth in the economy.
The Irish government is extremely reluctant to seek a bailout, analysts say, because of the stigma associated with applying for aid and the risk to its political standing.
The Fianna Fail Party leads a shaky coalition that holds only a thin majority in Parliament and could be forced to call early elections next year.
Dublin is also hoping to reassure markets that it can avoid a bailout by winning approval from the European Union for its bailout of Anglo Irish Bank.
The European Commission, the executive arm of the union, still needs to determine whether the bank bailout falls within European state aid rules. The commission is considering whether to approve a 6.4 billion euro portion of the bailout of Allied Irish and to agree to the overall restructuring plan.
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