By Ketaki Gokhale and Pratap Patnaik - Mar 20, 2012
India’s Supreme Court reaffirmed its earlier dismissal of a $2.2 billion tax claim on Vodafone Group Plc (VOD) after the government last month petitioned it to reconsider its decision.
A panel of judges comprising Chief Justice S.H. Kapadia, K.S. Radhakrishnan and Swatanter Kumar yesterday rejected a government plea to review the court’s January decision to dismiss a tax claim on Newbury, England-based Vodafone’s 2007 purchase of Hutchison Whampoa Ltd. (13)’s India operations, the court master said citing the chief justice.
The dismissal comes after Finance Minister Pranab Mukherjee last week in his annual budget speech proposed an amendment in the law that will enable the government to retrospectively tax cross-border transactions. Once the government makes the change in the law, it could petition the nation’s top court again, Dinesh Kanabar, deputy chief executive officer at KPMG’s India operations, said.
“The law provides that once the amendment is done, they will override any judgments of the court,” said Kanabar. “Vodafone would, obviously, need to prepare for something like that.”
Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd., a Cayman Islands company controlled by Hong Kong-based Hutchison.
`Unambiguous'
“The Supreme Court’s clear and unambiguous ruling, based on the existing laws of India, reiterates that the Indian tax authority does not have the jurisdiction to tax the transaction,” Vodafone said in an e-mailed statement.
Vodafone rose 2.1 percent to 170.80 pence in London.
India’s Supreme Court on Jan. 20 ruled the government can’t seek capital gains tax from Vodafone because the transaction occurred between foreign companies. The court also directed the government to return a 25 billion-rupee ($495 million) deposit Vodafone made on the contested tax bill, plus 4 percent interest.
The government will immediately return the deposit made by Vodafone, a finance ministry official told reporters in New Delhi yesterday, asking not to identified before a public announcement.
The government on Feb. 17 filed a petition to review the Supreme Court’s decision, seeking to overturn the January ruling.
The Indian tax department sought 112.2 billion rupees in capital gains levy from Vodafone, saying the company should have withheld the tax from its payment to Hutchison.
To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net; Pratap Patnaik in New Delhi at ppatnaik2@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Tuesday, March 20, 2012
Monday, March 19, 2012
Subbarao Boosts RBI Transparency as India Bond Buying Climbs
By Kartik Goyal - Mar 19, 2012
The Reserve Bank of India’s tomes on interest-rate policy made Subir Gokarn despair when he was a Standard & Poor’s economist. Now a deputy governor, he’s part of the biggest communication overhaul in the bank’s 77-year history.
“That really wasn’t the best way to do it,” Gokarn, 52, who joined the RBI in 2009, said in an interview in Mumbai last month. “Keep it short, keep it straightforward, so it takes five, 10 minutes to read and most people read it.”
Snappier, more frequent reviews of rate decisions and the introduction of guidance on future direction are part of an effort by Governor Duvvuri Subbarao to make monetary policy more predictable and credible in Asia’s third-largest economy. The campaign hasn’t been flawless: Gokarn wrong-footed analysts Jan. 5 by signaling that a reduction in lenders’ cash-reserve ratios would be “premature,” only to cut them 19 days later.
At stake is reducing the RBI’s gap with practices abroad as foreign investors have an increasing role in India’s government- debt market, with their holdings soaring more than sixfold since Subbarao, 62, took over in September 2008.
“The RBI has improved significantly in terms of clarity and frequency of market communication,” said Jahangir Aziz, chief India economist for JPMorgan Chase & Co., who previously worked at the International Monetary Fund. “There have been rather glaring flip flops by the RBI at times while the market for a long time -- and in some cases even now -- hasn’t fully got used to the new rhetoric.”
Briefings Started
On Subbarao’s watch the Reserve Bank has doubled the number of scheduled monetary policy meetings each year, to eight. It now releases minutes of a key advisory committee, and started regular media and analyst briefings.
“The changes that the RBI has enacted have helped improve the perception of external investors,” said Dhawal Dalal, Mumbai-based head of fixed income at DSP Blackrock Investment Managers Pvt., a joint venture with the world’s largest money manager. “They are trying to make the system safer.”
A relaxation of limits on purchasing Indian debt saw international investment in government and corporate debt surge to a record $31.5 billion in February, from $5.1 billion in the month Subbarao succeeded Yaga Venugopal Reddy, according to data compiled by Bloomberg. In November, authorities boosted the ceiling on foreign buying to $60 billion.
Investors also have been lured by yields on benchmark 10- year government securities that are more than twice that of China and South Korea and about four times the rate on similar- maturity U.S. Treasuries.
Bond Lure
Indian government bonds are Asia’s second-best performers this year after Indonesia, among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.
Subbarao, who pledged greater clarity after taking office, increased the number of scheduled monetary policy reviews in July 2010. Two months later, the central bank gave its first guidance on future action, saying tightening to damp inflation had “taken the monetary situation close to normal.”
In February 2011, the bank began releasing the minutes of the 12-person technical advisory committee on monetary policy, which includes seven outside advisers, along with Subbarao, Gokarn, and other RBI officials. The records revealed that the governor sometimes went against external guidance, such as on Jan. 24, when he left borrowing costs unchanged for a second month even after most outside advisers called for a cut.
ICICI Sees Clarity
“There is more clarity in the language of the policy statements and forward guidance on policy actions,” said N.S. Kannan, chief financial officer of ICICI Bank Ltd., India’s second-largest lender. Subbarao “has made the RBI more transparent through an effective communication policy,” he said.
As India’s economy increased sixfold from 1993, central bank practices struggled to keep up, retaining a preference for the 100-page policy documents full of repetitions and ambiguities that disheartened Gokarn. India’s gross domestic product has risen to 10th in the world, from 15th in 1993, reaching $1.84 trillion last year, according to IMF data.
Pressure for overhauling the RBI’s policy making escalated when the global financial crisis deepened in 2008, requiring faster action than afforded by the bank’s four scheduled rate- setting meetings. The Reserve Bank embarked upon a string of changes to rates or lenders’ reserve requirements at 11 unscheduled meetings in a period of about three years.
A total cut of 400 basis points off the cash reserve ratio and 425 basis points off the repurchase rate after Lehman Brothers Holdings Inc. collapsed in September 2008 “didn’t go down well with the market because of the surprise element,” Subbarao said in a speech in New Delhi in January 2011.
‘Unclear and Guarded’
“Earlier the RBI was quite secretive, even the language was very unclear and guarded,” said Tushar Pradhan, who manages about $1 billion as chief investment officer at HSBC Asset Management (India) Pvt. “The RBI has found that more information helps.”
As recently as 2005, monetary-policy reviews were held on a semiannual basis. Central banks worldwide have overhauled their communication strategies since that time, with the U.S. Federal Reserve accelerating publication of minutes of policy meetings and introducing press briefings, and the Reserve Bank of Australia and Banco de Mexico starting releases of minutes.
“The changes are part of the opening up of India’s economy and markets to the world -- a necessary process if India is to meet its aspirations of becoming a global power,” said Bimal Jalan, who led the RBI for almost six years, until September 2003.
Economic Test
The effectiveness of the increased transparency is being tested as Subbarao contends with slowing expansion amid elevated inflation. Prime Minister Manmohan Singh’s government last month lowered its forecast for gross domestic product growth to 6.9 percent for the fiscal year through March, the weakest since 2009, when the world was pulling out of recession.
India’s benchmark wholesale-price index increased 6.95 percent in February from a year before, quickening from 6.55 percent in January. While retaining a bias toward easing policy in future, the central bank said in a March 15 statement that “notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.’
Finance Minister Pranab Mukherjee said March 18 that he expects “policy rates to be reversed by the central bank in coming months.” Subbarao said in 2011 it’s an established practice for the central bank governor to meet the prime minister and the finance minister informally close to the policy decision.
Gokarn’s Signal
Among the bank’s challenges is managing periodic liquidity shortages in India’s banking system, which have prompted two reductions in the cash-reserve ratio so far this year.
Gokarn told journalists on Jan. 5 that cutting the ratio -- the proportion of deposits lenders must hold in reserve -- would send a “premature” signal of a change in monetary policy. The RBI then lowered it by half a percentage point on Jan. 24, surprising 16 of 21 economists surveyed by Bloomberg who predicted no change.
While “more frequent communication is positive,” the central bank is “talking too much, too often across many different channels, which causes confusion,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore.
Interest-rate swaps, a gauge of investors’ expectations for borrowing costs, also show the market isn’t always buying the bank’s rhetoric, according to Aziz at JPMorgan.
Swaps Market
The swaps rose as much as 18 basis points from Jan. 24, to 8.23 percent, even after the Reserve Bank signaled it’s more likely to cut interest rates. In September last year, the swaps fell to 7.6 percent while the central bank was raising rates.
“There have been long periods when the overnight swap spreads have diverged substantially from the RBI’s policy guidance and subsequent policy action,” said Aziz, a former adviser at the Ministry of Finance in New Delhi. “One doesn’t see that happening very often for example in the U.S. or Australia.”
The new openness doesn’t stop at the doors of the central bank’s headquarters in Mumbai. Subbarao and his four deputies visit villages across India to promote financial literacy in a nation where more than two thirds of the 1.2 billion population live on less than $2 a day. The officials also hold town-hall events where investors can question their decisions.
For investor Mahendra Jajoo, the move toward transparency is a reflection of the rapid changes the country has experienced in the past few decades, since Singh as finance minister in the early 1990s helped lead an effort to reduce regulation and barriers to trade and investment.
“My grandfather used to wear dhoti-kurta, my father shifted to wearing trousers and I wear jeans,” said Jajoo, chief investment officer for fixed income at Pramerica Asset Managers Ltd. which oversees $600 million. “I can’t say that my grandfather’s sense of dressing was bad. He was a person of his time. This is what the RBI has done. The current governor has responded very fast to the changing needs of the time.”
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.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
The Reserve Bank of India’s tomes on interest-rate policy made Subir Gokarn despair when he was a Standard & Poor’s economist. Now a deputy governor, he’s part of the biggest communication overhaul in the bank’s 77-year history.
“That really wasn’t the best way to do it,” Gokarn, 52, who joined the RBI in 2009, said in an interview in Mumbai last month. “Keep it short, keep it straightforward, so it takes five, 10 minutes to read and most people read it.”
Snappier, more frequent reviews of rate decisions and the introduction of guidance on future direction are part of an effort by Governor Duvvuri Subbarao to make monetary policy more predictable and credible in Asia’s third-largest economy. The campaign hasn’t been flawless: Gokarn wrong-footed analysts Jan. 5 by signaling that a reduction in lenders’ cash-reserve ratios would be “premature,” only to cut them 19 days later.
At stake is reducing the RBI’s gap with practices abroad as foreign investors have an increasing role in India’s government- debt market, with their holdings soaring more than sixfold since Subbarao, 62, took over in September 2008.
“The RBI has improved significantly in terms of clarity and frequency of market communication,” said Jahangir Aziz, chief India economist for JPMorgan Chase & Co., who previously worked at the International Monetary Fund. “There have been rather glaring flip flops by the RBI at times while the market for a long time -- and in some cases even now -- hasn’t fully got used to the new rhetoric.”
Briefings Started
On Subbarao’s watch the Reserve Bank has doubled the number of scheduled monetary policy meetings each year, to eight. It now releases minutes of a key advisory committee, and started regular media and analyst briefings.
“The changes that the RBI has enacted have helped improve the perception of external investors,” said Dhawal Dalal, Mumbai-based head of fixed income at DSP Blackrock Investment Managers Pvt., a joint venture with the world’s largest money manager. “They are trying to make the system safer.”
A relaxation of limits on purchasing Indian debt saw international investment in government and corporate debt surge to a record $31.5 billion in February, from $5.1 billion in the month Subbarao succeeded Yaga Venugopal Reddy, according to data compiled by Bloomberg. In November, authorities boosted the ceiling on foreign buying to $60 billion.
Investors also have been lured by yields on benchmark 10- year government securities that are more than twice that of China and South Korea and about four times the rate on similar- maturity U.S. Treasuries.
Bond Lure
Indian government bonds are Asia’s second-best performers this year after Indonesia, among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc.
Subbarao, who pledged greater clarity after taking office, increased the number of scheduled monetary policy reviews in July 2010. Two months later, the central bank gave its first guidance on future action, saying tightening to damp inflation had “taken the monetary situation close to normal.”
In February 2011, the bank began releasing the minutes of the 12-person technical advisory committee on monetary policy, which includes seven outside advisers, along with Subbarao, Gokarn, and other RBI officials. The records revealed that the governor sometimes went against external guidance, such as on Jan. 24, when he left borrowing costs unchanged for a second month even after most outside advisers called for a cut.
ICICI Sees Clarity
“There is more clarity in the language of the policy statements and forward guidance on policy actions,” said N.S. Kannan, chief financial officer of ICICI Bank Ltd., India’s second-largest lender. Subbarao “has made the RBI more transparent through an effective communication policy,” he said.
As India’s economy increased sixfold from 1993, central bank practices struggled to keep up, retaining a preference for the 100-page policy documents full of repetitions and ambiguities that disheartened Gokarn. India’s gross domestic product has risen to 10th in the world, from 15th in 1993, reaching $1.84 trillion last year, according to IMF data.
Pressure for overhauling the RBI’s policy making escalated when the global financial crisis deepened in 2008, requiring faster action than afforded by the bank’s four scheduled rate- setting meetings. The Reserve Bank embarked upon a string of changes to rates or lenders’ reserve requirements at 11 unscheduled meetings in a period of about three years.
A total cut of 400 basis points off the cash reserve ratio and 425 basis points off the repurchase rate after Lehman Brothers Holdings Inc. collapsed in September 2008 “didn’t go down well with the market because of the surprise element,” Subbarao said in a speech in New Delhi in January 2011.
‘Unclear and Guarded’
“Earlier the RBI was quite secretive, even the language was very unclear and guarded,” said Tushar Pradhan, who manages about $1 billion as chief investment officer at HSBC Asset Management (India) Pvt. “The RBI has found that more information helps.”
As recently as 2005, monetary-policy reviews were held on a semiannual basis. Central banks worldwide have overhauled their communication strategies since that time, with the U.S. Federal Reserve accelerating publication of minutes of policy meetings and introducing press briefings, and the Reserve Bank of Australia and Banco de Mexico starting releases of minutes.
“The changes are part of the opening up of India’s economy and markets to the world -- a necessary process if India is to meet its aspirations of becoming a global power,” said Bimal Jalan, who led the RBI for almost six years, until September 2003.
Economic Test
The effectiveness of the increased transparency is being tested as Subbarao contends with slowing expansion amid elevated inflation. Prime Minister Manmohan Singh’s government last month lowered its forecast for gross domestic product growth to 6.9 percent for the fiscal year through March, the weakest since 2009, when the world was pulling out of recession.
India’s benchmark wholesale-price index increased 6.95 percent in February from a year before, quickening from 6.55 percent in January. While retaining a bias toward easing policy in future, the central bank said in a March 15 statement that “notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.’
Finance Minister Pranab Mukherjee said March 18 that he expects “policy rates to be reversed by the central bank in coming months.” Subbarao said in 2011 it’s an established practice for the central bank governor to meet the prime minister and the finance minister informally close to the policy decision.
Gokarn’s Signal
Among the bank’s challenges is managing periodic liquidity shortages in India’s banking system, which have prompted two reductions in the cash-reserve ratio so far this year.
Gokarn told journalists on Jan. 5 that cutting the ratio -- the proportion of deposits lenders must hold in reserve -- would send a “premature” signal of a change in monetary policy. The RBI then lowered it by half a percentage point on Jan. 24, surprising 16 of 21 economists surveyed by Bloomberg who predicted no change.
While “more frequent communication is positive,” the central bank is “talking too much, too often across many different channels, which causes confusion,” said Rajeev Malik, a senior economist at CLSA Asia-Pacific Markets in Singapore.
Interest-rate swaps, a gauge of investors’ expectations for borrowing costs, also show the market isn’t always buying the bank’s rhetoric, according to Aziz at JPMorgan.
Swaps Market
The swaps rose as much as 18 basis points from Jan. 24, to 8.23 percent, even after the Reserve Bank signaled it’s more likely to cut interest rates. In September last year, the swaps fell to 7.6 percent while the central bank was raising rates.
“There have been long periods when the overnight swap spreads have diverged substantially from the RBI’s policy guidance and subsequent policy action,” said Aziz, a former adviser at the Ministry of Finance in New Delhi. “One doesn’t see that happening very often for example in the U.S. or Australia.”
The new openness doesn’t stop at the doors of the central bank’s headquarters in Mumbai. Subbarao and his four deputies visit villages across India to promote financial literacy in a nation where more than two thirds of the 1.2 billion population live on less than $2 a day. The officials also hold town-hall events where investors can question their decisions.
For investor Mahendra Jajoo, the move toward transparency is a reflection of the rapid changes the country has experienced in the past few decades, since Singh as finance minister in the early 1990s helped lead an effort to reduce regulation and barriers to trade and investment.
“My grandfather used to wear dhoti-kurta, my father shifted to wearing trousers and I wear jeans,” said Jajoo, chief investment officer for fixed income at Pramerica Asset Managers Ltd. which oversees $600 million. “I can’t say that my grandfather’s sense of dressing was bad. He was a person of his time. This is what the RBI has done. The current governor has responded very fast to the changing needs of the time.”
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.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Sunday, March 18, 2012
Biggest Budget Miss Since 2009 Hurts Confidence: India Credit
By V. Ramakrishnan, Kartik Goyal and Jeanette Rodrigues - Mar 19, 2012
Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12 percent increase in debt sales, sending bond yields to a two-month high.
The shortfall in finances in the year ending March will be 5.9 percent of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech in parliament. That was the biggest margin of failure since falling short of the aim by 3.5 percentage points in the 12 months through March 2009, the height of the global financial crisis.
Goldman Sachs Asset Management Ltd. and FIM Asset Management Ltd. said the budget didn’t do enough to restore the credibility of Mukherjee, who pledged to cut the deficit to 5.1 percent of GDP in the 12 months starting April. The yield on 10- year bonds had the biggest weekly increase since January to 8.43 percent last week, compared with 3.55 percent in China, where the 2012 deficit was 1.5 percent of GDP.
“There is nothing in this budget that’s going to make people believe that India is now on a more credible long-term fiscal path,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview to Bloomberg UTV on March 16. “Some of the concerns and risks that many people would have had before the budget, stay in place.”
India missed its deficit target three times in the last 10 years. Mukherjee fell short of his revenue goal for the current fiscal year as economic growth slowed and the government met only 35 percent of a program to raise 400 billion rupees ($8 billion) by selling state assets. Asia’s third-largest economy is likely to grow 6.9 percent in the year through March, the least in three years, Mukherjee told parliament.
Rating Constrained
Standard & Poor’s, which ranks India’s bonds at BBB-, the lowest investment grade, said the deficit target for the next fiscal year is “still quite high.” The shortfall has been the “single-most constraining factor” in improving the country’s ratings, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P, said in an interview on March 16.
The finance ministry plans to sell a record 5.69 trillion rupees of debt the next fiscal year, compared with 5.1 trillion rupees in the 12 months ending March 31. Underwriters had to buy unsold bonds at nine auctions this fiscal year, central bank data show, signaling demand didn’t match supply of notes. The government will set the first-half borrowing target on March 23, Shaktikanta Das, additional secretary in the ministry, said on March 16.
Yields on 10-year (GIND10YR) sovereign debt jumped 14 basis points, 0.14 percentage point, last week after data on the website of the Controller General of Accounts showed India’s budget gap widened to 4.35 trillion rupees in the 10 months through January, exceeding the full-year target of 4.13 trillion rupees. A year earlier, the shortfall was 58.3 percent of the annual goal.
‘Always Overspends’
“I doubt they can achieve the fiscal-deficit target,” Robert Prior-Wandesforde, a Singapore-based director of Asian economics at Credit Suisse Group AG, said in an interview on March 16. “We know from history that the government always overspends relative to its targets.”
The shortfall will reach 5.8 percent of GDP in the year starting April, he predicts. The finance ministry has exceeded its budgeted spending target in eight of the last 10 years, according to government data.
The yield on the 8.79 percent note due November 2021 fell one basis point today after climbing seven basis points on March 16. The extra yield investors seek to hold the notes instead of U.S. Treasuries has rebounded 11 basis points from an eight- month low of 601 reached on March 14, data compiled by Bloomberg show.
Spectrum Sale
Rupee-denominated bonds handed investors a loss of 0.3 percent in March, compared with a 0.2 percent return on yuan notes, according to indexes compiled by HSBC Holdings Plc. India’s revenue collection was 69.5 percent of the full-year target in the 10 months through January, compared with 92.2 percent a year earlier, official data showed this month. The rupee advanced 0.2 percent today to 50.0885 per dollar after declining 0.7 percent last week, according to data compiled by Bloomberg.
India may cut the fiscal deficit more than budgeted, benefiting from the sale of telecom spectrum, according to Gordon Rodrigues, an investment director at HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion of Asian fixed-income assets. The spectrum sales may earn India 400 billion rupees in the year starting April 1, R. Gopalan, the top bureaucrat in the department of economic affairs at the Ministry of Finance, said on March 16.
“The budget measures are a move in the right direction in terms of the fiscal deficit,” Hong Kong-based Rodrigues said in an interview on March 16. “There is a possibility the government may actually do better than what they said as proceeds from a 4G spectrum auction and 2G rebidding have not been taken into account. So there’s less implementation risk in this budget.”
Investment Outflows
Still, global investors have cut holdings of Indian debt by $634 million since Feb. 29, pulling money out of the local market for the first time in six months, exchange data show.
The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed this month. Five-year credit-default swaps on the lender now cost 305 basis points, compared with 300 at the end of February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.
Prime Minister Manmohan Singh’s government is facing hurdles to his policies from its largest coalition partner, Trinamool Congress. The ally’s leader, Mamata Banerjee, opposed a plan to raise passenger rail fares, proposed by her party colleague Railway Minister Dinesh Trivedi this week.
‘No Roadmap’
The government was forced to scrap plans to allow foreign retailers like Wal-Mart Stores Inc. (WMT) into India in December amid opposition from its allies, including Trinamool. Singh shelved proposals to allow foreign direct investment in pensions in December after Trinamool refused support.
“As a foreigner, I am disappointed because there is no roadmap for reforms and no indication of how the most difficult task of curbing the deficit will be met,” Taina Erajuuri, a Helsinki-based money manager at FIM that oversees about 1.1 billion euros ($1.4 billion) of emerging-market assets, said in an interview on March 16. “The government may not be able to meet its deficit target because of deepening global uncertainties.”
The 10-year yield may climb to 8.6 percent in three months, she predicted.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net.
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Indian Finance Minister Pranab Mukherjee missed his budget-deficit target by the most in three years and announced a 12 percent increase in debt sales, sending bond yields to a two-month high.
The shortfall in finances in the year ending March will be 5.9 percent of gross domestic product, 1.3 percentage points more than the goal, Mukherjee said in a March 16 speech in parliament. That was the biggest margin of failure since falling short of the aim by 3.5 percentage points in the 12 months through March 2009, the height of the global financial crisis.
Goldman Sachs Asset Management Ltd. and FIM Asset Management Ltd. said the budget didn’t do enough to restore the credibility of Mukherjee, who pledged to cut the deficit to 5.1 percent of GDP in the 12 months starting April. The yield on 10- year bonds had the biggest weekly increase since January to 8.43 percent last week, compared with 3.55 percent in China, where the 2012 deficit was 1.5 percent of GDP.
“There is nothing in this budget that’s going to make people believe that India is now on a more credible long-term fiscal path,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview to Bloomberg UTV on March 16. “Some of the concerns and risks that many people would have had before the budget, stay in place.”
India missed its deficit target three times in the last 10 years. Mukherjee fell short of his revenue goal for the current fiscal year as economic growth slowed and the government met only 35 percent of a program to raise 400 billion rupees ($8 billion) by selling state assets. Asia’s third-largest economy is likely to grow 6.9 percent in the year through March, the least in three years, Mukherjee told parliament.
Rating Constrained
Standard & Poor’s, which ranks India’s bonds at BBB-, the lowest investment grade, said the deficit target for the next fiscal year is “still quite high.” The shortfall has been the “single-most constraining factor” in improving the country’s ratings, Takahira Ogawa, a Singapore-based director of sovereign ratings at S&P, said in an interview on March 16.
The finance ministry plans to sell a record 5.69 trillion rupees of debt the next fiscal year, compared with 5.1 trillion rupees in the 12 months ending March 31. Underwriters had to buy unsold bonds at nine auctions this fiscal year, central bank data show, signaling demand didn’t match supply of notes. The government will set the first-half borrowing target on March 23, Shaktikanta Das, additional secretary in the ministry, said on March 16.
Yields on 10-year (GIND10YR) sovereign debt jumped 14 basis points, 0.14 percentage point, last week after data on the website of the Controller General of Accounts showed India’s budget gap widened to 4.35 trillion rupees in the 10 months through January, exceeding the full-year target of 4.13 trillion rupees. A year earlier, the shortfall was 58.3 percent of the annual goal.
‘Always Overspends’
“I doubt they can achieve the fiscal-deficit target,” Robert Prior-Wandesforde, a Singapore-based director of Asian economics at Credit Suisse Group AG, said in an interview on March 16. “We know from history that the government always overspends relative to its targets.”
The shortfall will reach 5.8 percent of GDP in the year starting April, he predicts. The finance ministry has exceeded its budgeted spending target in eight of the last 10 years, according to government data.
The yield on the 8.79 percent note due November 2021 fell one basis point today after climbing seven basis points on March 16. The extra yield investors seek to hold the notes instead of U.S. Treasuries has rebounded 11 basis points from an eight- month low of 601 reached on March 14, data compiled by Bloomberg show.
Spectrum Sale
Rupee-denominated bonds handed investors a loss of 0.3 percent in March, compared with a 0.2 percent return on yuan notes, according to indexes compiled by HSBC Holdings Plc. India’s revenue collection was 69.5 percent of the full-year target in the 10 months through January, compared with 92.2 percent a year earlier, official data showed this month. The rupee advanced 0.2 percent today to 50.0885 per dollar after declining 0.7 percent last week, according to data compiled by Bloomberg.
India may cut the fiscal deficit more than budgeted, benefiting from the sale of telecom spectrum, according to Gordon Rodrigues, an investment director at HSBC Global Asset Management, a unit of Europe’s biggest bank that oversees $25 billion of Asian fixed-income assets. The spectrum sales may earn India 400 billion rupees in the year starting April 1, R. Gopalan, the top bureaucrat in the department of economic affairs at the Ministry of Finance, said on March 16.
“The budget measures are a move in the right direction in terms of the fiscal deficit,” Hong Kong-based Rodrigues said in an interview on March 16. “There is a possibility the government may actually do better than what they said as proceeds from a 4G spectrum auction and 2G rebidding have not been taken into account. So there’s less implementation risk in this budget.”
Investment Outflows
Still, global investors have cut holdings of Indian debt by $634 million since Feb. 29, pulling money out of the local market for the first time in six months, exchange data show.
The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed this month. Five-year credit-default swaps on the lender now cost 305 basis points, compared with 300 at the end of February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.
Prime Minister Manmohan Singh’s government is facing hurdles to his policies from its largest coalition partner, Trinamool Congress. The ally’s leader, Mamata Banerjee, opposed a plan to raise passenger rail fares, proposed by her party colleague Railway Minister Dinesh Trivedi this week.
‘No Roadmap’
The government was forced to scrap plans to allow foreign retailers like Wal-Mart Stores Inc. (WMT) into India in December amid opposition from its allies, including Trinamool. Singh shelved proposals to allow foreign direct investment in pensions in December after Trinamool refused support.
“As a foreigner, I am disappointed because there is no roadmap for reforms and no indication of how the most difficult task of curbing the deficit will be met,” Taina Erajuuri, a Helsinki-based money manager at FIM that oversees about 1.1 billion euros ($1.4 billion) of emerging-market assets, said in an interview on March 16. “The government may not be able to meet its deficit target because of deepening global uncertainties.”
The 10-year yield may climb to 8.6 percent in three months, she predicted.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net.
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net.
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Saturday, March 17, 2012
Asia Currencies Slide in Week as Fed Stance Boosts Dollar Demand
By David Yong - Mar 17, 2012 2:49 AM GMT+0530
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Asian currencies had a second weekly decline as an improving U.S. economy and the Federal Reserve’s decision not to embark on further monetary easing boosted demand for the dollar.
Malaysia’s ringgit led losses after the government reported factory production rose the least in six months in January following data last week showing the smallest increase in exports since 2010. The rupee posted its worst weekly losing streak for the year after policy makers left interest rates unchanged, citing inflation risks caused by higher oil prices.
“This week’s main trend was the dollar’s appreciation supported by signs of U.S. economic improvement,” said Minori Uchida, a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. “Based on the series of data recently, the market also views the Fed may not keep low interest rates until 2014 as previously predicted.”
The ringgit fell 1.7 percent from a week ago to 3.0613 per dollar in Kuala Lumpur yesterday, after reaching a seven-week low on March 15, according to data compiled by Bloomberg. The Philippine peso declined 1.1 percent to 43.068, the rupee dropped 0.7 percent to 50.1912, and South Korea’s won lost 0.7 percent to 1,125.78.
Other reports from Asia this week signaled economic growth in the region is starting to slow. Thailand’s exports contracted for a third month in January, while China reported its worst trade deficit since at least 1989 for February. The Bloomberg- JPMorgan Asia Dollar Index (ADXY), which tracks the region’s 10 most- active currencies excluding the yen, fell 0.5 percent.
U.S. Data Stimulus
In contrast, U.S. data issued this week showed Americans applied for fewer jobless benefits, growth in retail sales accelerated and manufacturing gained momentum. The Dollar Index (DXY) traded on ICE Futures in New York, which tracks the currency against those of six major trading partners, rose for a third week and reached its highest level in almost two months.
China’s yuan fell for a third week after the government reported the smallest increase in consumer prices in 20 months on March 9. The central bank weakened its daily reference rate by 0.25 percent yesterday, the most in a week, to 6.3200 per dollar. The currency dropped 0.2 percent from March 9 to 6.3227 in Shanghai, according to the China Foreign Exchange Trade System.
“China’s policy makers are definitely increasing volatility,” said Craig Chan, the Singapore-based head of foreign exchange for Asia outside of Japan at Nomura Holdings Inc. “They want to eventually move to a more market-driven currency.”
Oil Pressure
The won traded near a one-month low after the Bank of Korea said on March 14 that the unemployment rate unexpectedly jumped to 3.7 percent in February, the highest in almost a year.
Indonesia’s rupiah dropped 0.4 percent to 9,156 per dollar and hit a two-month low of 9,218 on March 15. The currency completed a second weekly decline after overseas investors cut holdings of sovereign debt on concern government plans to raise energy prices will stoke inflation.
Global funds have trimmed bond ownership by 6.1 trillion rupiah ($665 million) since Feb. 22, when President Susilo Bambang Yudhoyono said fuel subsidies must be reduced.
“The biggest factor driving the rupiah is still the plan to raise fuel prices, which caused inflation expectations in Indonesia to rise significantly,” said Mika Martumpal, an analyst at PT Bank CIMB Niaga in Jakarta.
Elsewhere this week, Thailand’s baht fell 0.5 percent to 30.75 per dollar, while Taiwan’s dollar slipped 0.2 percent to NT$29.562 and Vietnam’s dong rose 0.1 percent to 20,820.
To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net.
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.
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Asian currencies had a second weekly decline as an improving U.S. economy and the Federal Reserve’s decision not to embark on further monetary easing boosted demand for the dollar.
Malaysia’s ringgit led losses after the government reported factory production rose the least in six months in January following data last week showing the smallest increase in exports since 2010. The rupee posted its worst weekly losing streak for the year after policy makers left interest rates unchanged, citing inflation risks caused by higher oil prices.
“This week’s main trend was the dollar’s appreciation supported by signs of U.S. economic improvement,” said Minori Uchida, a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. “Based on the series of data recently, the market also views the Fed may not keep low interest rates until 2014 as previously predicted.”
The ringgit fell 1.7 percent from a week ago to 3.0613 per dollar in Kuala Lumpur yesterday, after reaching a seven-week low on March 15, according to data compiled by Bloomberg. The Philippine peso declined 1.1 percent to 43.068, the rupee dropped 0.7 percent to 50.1912, and South Korea’s won lost 0.7 percent to 1,125.78.
Other reports from Asia this week signaled economic growth in the region is starting to slow. Thailand’s exports contracted for a third month in January, while China reported its worst trade deficit since at least 1989 for February. The Bloomberg- JPMorgan Asia Dollar Index (ADXY), which tracks the region’s 10 most- active currencies excluding the yen, fell 0.5 percent.
U.S. Data Stimulus
In contrast, U.S. data issued this week showed Americans applied for fewer jobless benefits, growth in retail sales accelerated and manufacturing gained momentum. The Dollar Index (DXY) traded on ICE Futures in New York, which tracks the currency against those of six major trading partners, rose for a third week and reached its highest level in almost two months.
China’s yuan fell for a third week after the government reported the smallest increase in consumer prices in 20 months on March 9. The central bank weakened its daily reference rate by 0.25 percent yesterday, the most in a week, to 6.3200 per dollar. The currency dropped 0.2 percent from March 9 to 6.3227 in Shanghai, according to the China Foreign Exchange Trade System.
“China’s policy makers are definitely increasing volatility,” said Craig Chan, the Singapore-based head of foreign exchange for Asia outside of Japan at Nomura Holdings Inc. “They want to eventually move to a more market-driven currency.”
Oil Pressure
The won traded near a one-month low after the Bank of Korea said on March 14 that the unemployment rate unexpectedly jumped to 3.7 percent in February, the highest in almost a year.
Indonesia’s rupiah dropped 0.4 percent to 9,156 per dollar and hit a two-month low of 9,218 on March 15. The currency completed a second weekly decline after overseas investors cut holdings of sovereign debt on concern government plans to raise energy prices will stoke inflation.
Global funds have trimmed bond ownership by 6.1 trillion rupiah ($665 million) since Feb. 22, when President Susilo Bambang Yudhoyono said fuel subsidies must be reduced.
“The biggest factor driving the rupiah is still the plan to raise fuel prices, which caused inflation expectations in Indonesia to rise significantly,” said Mika Martumpal, an analyst at PT Bank CIMB Niaga in Jakarta.
Elsewhere this week, Thailand’s baht fell 0.5 percent to 30.75 per dollar, while Taiwan’s dollar slipped 0.2 percent to NT$29.562 and Vietnam’s dong rose 0.1 percent to 20,820.
To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net.
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.
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Friday, March 16, 2012
India Deficit Surpassing 5% for Second Year Limits Rate-Cut Room
By Unni Krishnan and Kartik Goyal - Mar 16, 2012
The Reserve Bank of India’s scope for a series of interest-rate cuts to bolster a slowing economy may be hampered by inflation risks from a budget deficit projected to exceed 5 percent for a second year.
Benchmark bonds capped their biggest weekly decline in seven as Finance Minister Pranab Mukherjee unveiled an annual budget yesterday that will require record borrowings of 5.69 trillion rupees ($113 billion) to finance a gap estimated at 5.1 percent of gross domestic product. The deficit for the year through March 31 is projected at 5.9 percent, wider than the 4.6 percent target set in 2011.
Borrowing costs at the highest level since 2008 to fight price rises, policy gridlock and slumping investment contributed to a slowdown in growth to 6.1 percent last quarter, the weakest pace since 2009. Public finances have been “deteriorating and remain a key weakness” in India’s credit rating, Fitch Ratings said after Mukherjee proposed a cap on subsidies and raised service and excise taxes.
“The RBI said that it was waiting for the budget to crystallize on the timing and magnitude of rate cuts,” said Killol Pandya, the Mumbai-based head of fixed-income investment at the local unit of Daiwa Asset Management Co. “This budget does not give any comfort. It raises concern of the RBI pushing back its timelines regarding rate cuts.”
Interest-Rate Decision
The Reserve Bank of India left interest rates unchanged at 8.5 percent for a third meeting on March 15, joining Asian nations from Indonesia to South Korea in holding borrowing costs. While it reiterated that future actions will be toward lowering rates, the central bank said lingering inflation risks will influence the timing and magnitude of such moves.
The monetary authority also said “credible fiscal consolidation” will be an “important factor” in shaping the inflation outlook. After the budget, Deputy Governor Subir Gokarn said the estimated reduction in the budget deficit is a “significant correction” and that the commitment to cap subsidies is important.
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose by 17 basis points since March 14 to a more than four-month high of 8.22 percent, reflecting investors’ concern the central bank may delay reduction in interest rates. The rate rose five basis points yesterday. The yield on the 8.79 percent bonds due November 2021 jumped 14 basis points this week to 8.43 percent, the most since the period ended Jan. 27.
Widest BRIC Deficit
Asia’s third-largest economy has the widest fiscal deficit among the so-called BRIC nations that also include Brazil, Russia and China. It has the group’s fastest inflation, with India’s benchmark wholesale-price index climbing 6.95 percent in February from a year earlier.
“It doesn’t appear that the RBI is in a hurry to immediately start cutting rates,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. “They will digest the budget arithmetic more closely and they would simultaneously view the cues for global crude prices.”
Brent crude, the benchmark for almost all of India’s imports, has jumped about 15 percent so far this year. India imports three-quarters of its oil.
Mukherjee proposed yesterday a cap of less than 2 percent of GDP in the next fiscal year on a subsidy program that spans diesel to fertilizers. He raised service and excise taxes to 12 percent from 10 percent.
While the subsidy cap would be positive for India, implementation risk is “high” ahead of the 2014 general election, Fitch Ratings said.
Crude Oil Surge
“The government might pass through significant amounts of the tightness in crude prices and if that happens then it will have an impact on inflation,” Daiwa’s Pandya said. “That puts a question mark on the RBI’s stance on interest rates.”
The Reserve Bank raised borrowing costs by a record 3.75 percentage points from 2010 to October last year to fight price rises. It unexpectedly cut the amount of deposits lenders need to set aside as reserves on Jan. 24 and March 9 to ease a cash squeeze, lowering the cash reserve ratio to 4.75 percent.
Prime Minister Manmohan Singh’s government, routed in state elections this year, faces pressure to support the 69 percent of India’s 1.2 billion population living on less than $2 per day.
Moody’s Investors Service said March 8 that India needs “persistent” policy efforts over several years to narrow a deficit that if left unchecked will hurt the economy. Slowing growth has hampered tax revenues even as subsidies and a job guarantee program for rural workers spur spending.
The government predicts GDP may rise 6.9 percent this fiscal year, compared with 8.4 percent in the previous one. Mukherjee estimated GDP may rise as much as 7.85 percent in the year through March 2013 and that inflation will ease in coming months.
The budget “can probably be best described as a good old- fashioned tax and spending plan,” said Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group AG. “Sadly, but not unexpectedly, proposals for radical economic reform were largely notable by their absence.”
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
The Reserve Bank of India’s scope for a series of interest-rate cuts to bolster a slowing economy may be hampered by inflation risks from a budget deficit projected to exceed 5 percent for a second year.
Benchmark bonds capped their biggest weekly decline in seven as Finance Minister Pranab Mukherjee unveiled an annual budget yesterday that will require record borrowings of 5.69 trillion rupees ($113 billion) to finance a gap estimated at 5.1 percent of gross domestic product. The deficit for the year through March 31 is projected at 5.9 percent, wider than the 4.6 percent target set in 2011.
Borrowing costs at the highest level since 2008 to fight price rises, policy gridlock and slumping investment contributed to a slowdown in growth to 6.1 percent last quarter, the weakest pace since 2009. Public finances have been “deteriorating and remain a key weakness” in India’s credit rating, Fitch Ratings said after Mukherjee proposed a cap on subsidies and raised service and excise taxes.
“The RBI said that it was waiting for the budget to crystallize on the timing and magnitude of rate cuts,” said Killol Pandya, the Mumbai-based head of fixed-income investment at the local unit of Daiwa Asset Management Co. “This budget does not give any comfort. It raises concern of the RBI pushing back its timelines regarding rate cuts.”
Interest-Rate Decision
The Reserve Bank of India left interest rates unchanged at 8.5 percent for a third meeting on March 15, joining Asian nations from Indonesia to South Korea in holding borrowing costs. While it reiterated that future actions will be toward lowering rates, the central bank said lingering inflation risks will influence the timing and magnitude of such moves.
The monetary authority also said “credible fiscal consolidation” will be an “important factor” in shaping the inflation outlook. After the budget, Deputy Governor Subir Gokarn said the estimated reduction in the budget deficit is a “significant correction” and that the commitment to cap subsidies is important.
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose by 17 basis points since March 14 to a more than four-month high of 8.22 percent, reflecting investors’ concern the central bank may delay reduction in interest rates. The rate rose five basis points yesterday. The yield on the 8.79 percent bonds due November 2021 jumped 14 basis points this week to 8.43 percent, the most since the period ended Jan. 27.
Widest BRIC Deficit
Asia’s third-largest economy has the widest fiscal deficit among the so-called BRIC nations that also include Brazil, Russia and China. It has the group’s fastest inflation, with India’s benchmark wholesale-price index climbing 6.95 percent in February from a year earlier.
“It doesn’t appear that the RBI is in a hurry to immediately start cutting rates,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. “They will digest the budget arithmetic more closely and they would simultaneously view the cues for global crude prices.”
Brent crude, the benchmark for almost all of India’s imports, has jumped about 15 percent so far this year. India imports three-quarters of its oil.
Mukherjee proposed yesterday a cap of less than 2 percent of GDP in the next fiscal year on a subsidy program that spans diesel to fertilizers. He raised service and excise taxes to 12 percent from 10 percent.
While the subsidy cap would be positive for India, implementation risk is “high” ahead of the 2014 general election, Fitch Ratings said.
Crude Oil Surge
“The government might pass through significant amounts of the tightness in crude prices and if that happens then it will have an impact on inflation,” Daiwa’s Pandya said. “That puts a question mark on the RBI’s stance on interest rates.”
The Reserve Bank raised borrowing costs by a record 3.75 percentage points from 2010 to October last year to fight price rises. It unexpectedly cut the amount of deposits lenders need to set aside as reserves on Jan. 24 and March 9 to ease a cash squeeze, lowering the cash reserve ratio to 4.75 percent.
Prime Minister Manmohan Singh’s government, routed in state elections this year, faces pressure to support the 69 percent of India’s 1.2 billion population living on less than $2 per day.
Moody’s Investors Service said March 8 that India needs “persistent” policy efforts over several years to narrow a deficit that if left unchecked will hurt the economy. Slowing growth has hampered tax revenues even as subsidies and a job guarantee program for rural workers spur spending.
The government predicts GDP may rise 6.9 percent this fiscal year, compared with 8.4 percent in the previous one. Mukherjee estimated GDP may rise as much as 7.85 percent in the year through March 2013 and that inflation will ease in coming months.
The budget “can probably be best described as a good old- fashioned tax and spending plan,” said Robert Prior-Wandesforde, Singapore-based director of Asian economics at Credit Suisse Group AG. “Sadly, but not unexpectedly, proposals for radical economic reform were largely notable by their absence.”
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.
To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Monday, March 12, 2012
Sovereign Purchases Quadrupling Mimics U.S. Banks’ Holdings: India Credit
By Jeanette Rodrigues and Anoop Agrawal - Mar 12, 2012
India’s banks have quadrupled purchases of government bonds to bring their total ownership to a record, undermining policy makers’ efforts to inject cash into Asia’s third-biggest economy.
Lenders, which bought 130 billion rupees ($2.6 billion) in the final three months of last year, added 522 billion rupees this quarter, taking holdings to 17.4 trillion rupees. Federal securities will be a “good investment proposition,” Indian Overseas Bank Chairman and Managing Director M. Narendra said in an interview from the southern Indian city of Chennai yesterday.
The central bank cut reserve requirements for lenders by 75 basis points on March 9 to ease a shortage of cash in the financial system as companies pay taxes this month. In the U.S., banks and treasuries bought more government and related debt in the first two months of 2012 than they did in all of 2011.
Indian notes have returned an annualized 17.5 percent this year, compared with Chinese securities that earned 1.1 percent and U.S. debt that lost 3.1 percent, according to Bank of America-Merrill Lynch data. Yields on rupee-denominated bonds will drop further as the central bank cuts its benchmark repurchase rate by 100 basis points in the fiscal year starting April, according to IDBI Bank Ltd. (IDBI) and IndusInd Bank Ltd.
‘High Amount’
“Government securities are very attractive, and with rate cuts expected, bank treasuries would be buying bonds,” N.S. Venkatesh, Mumbai-based head of treasury at state-run IDBI, said in an interview on March 9. “Sovereign yields are likely to fall further.”
Commercial lenders in the U.S. purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Federal Reserve data show.
India’s banks boosted holdings of government bonds by 415.3 billion rupees in the two weeks through Feb. 10, the largest increase since the period ended Oct. 7. Lenders hold a “high amount” of sovereign debt and need to reduce ownership, Reserve Bank of India Governor Duvvuri Subbarao said on March 9, when the monetary authority cut reserve requirements to 4.75 percent.
The yield on India’s benchmark bonds rose one basis point, or 0.01 percentage point, to 8.31 percent today, before tomorrow’s government data that economists predict will show inflation accelerated to 6.7 percent in February from 6.6 percent the month before. The increase in yield pared the drop for this year to 27 basis points. Yields on similar-maturity securities have climbed 11 basis points in China (CTCNY10Y) in 2012 and 16 basis points in the U.S (USGG10YR).
Slowing Economy
Credit growth at Indian banks is slowing as lenders put more money into government bonds. Loans rose 15.6 percent in the year through Feb. 24, the least since 12 months through January 2010, according to central bank data.
Rupee-denominated debt will rally further as a stalling economy prompts policy makers to cut the repurchase rate by 50 basis points in 2012, according to state-owned Bank of India. Gross domestic product rose 6.1 percent in three months through December, the least since the first quarter of 2009, according to government data.
“It is reasonable to position oneself with expectations that rate reductions will start soon,” N. Seshadri, a Mumbai- based executive director at Bank of India, said in an interview yesterday. “The present level of interest rates aren’t helping achieve sustainable growth.”
Bank Borrowings
The rally in bonds is attracting global funds, which have boosted their holdings of Indian debt every month since October. They have raised their ownership by $5.1 billion in 2012, spurring gains in the rupee. The currency strengthened 0.1 percent to 49.9250 per dollar today. The rupee has rebounded 6.3 percent this year after slumping 16 percent in 2011, the worst performance in Asia.
Cash availability at lenders has worsened on speculation the central bank kept buying rupees to stem the decline in the currency. Banks borrowed an average 1.33 trillion rupees a day from the Reserve Bank this month, more than double the 600 billion-rupee limit favored by the monetary authority.
The shortage of funds is likely to persist as Finance Minister Pranab Mukherjee will announce a higher borrowing program for the fiscal year starting April when he unveils the federal budget on March 16, according to FirstRand Ltd., a unit of South Africa’s second-largest banking group. The government increased its borrowing plan by 23 percent in the current fiscal year as revenue dropped because of slowing economic growth.
‘Likely to Persist’
“The market seems to be pricing in repo-rate reductions starting as early as April,” Krishnamurthy Harihar, a Mumbai- based treasurer at FirstRand, said in an interview on March 9. “However, with the likelihood of a large and front-loaded government borrowing program next fiscal year, liquidity tightness is likely to persist and yields are unlikely to fall much.”
The 10-year yield could stay at about 8.25 percent “for the coming months,” he predicted.
The cost of protecting the debt of State Bank of India (SBIN) against default has slid this year. Credit-default swaps on the lender, which some investors consider a proxy for the sovereign, have fallen to 319 basis points from 395 basis points at the end of last year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value should a company fail to adhere to its agreements.
The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has narrowed to 626 basis points from a record 697 basis points touched in November.
“Government bonds are going to be a good investment proposition,” Indian Overseas Bank’s Narendra said in a telephone interview. “Yields have priced in most of the risks and they are above where they should be. I expect a slide.”
To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
India’s banks have quadrupled purchases of government bonds to bring their total ownership to a record, undermining policy makers’ efforts to inject cash into Asia’s third-biggest economy.
Lenders, which bought 130 billion rupees ($2.6 billion) in the final three months of last year, added 522 billion rupees this quarter, taking holdings to 17.4 trillion rupees. Federal securities will be a “good investment proposition,” Indian Overseas Bank Chairman and Managing Director M. Narendra said in an interview from the southern Indian city of Chennai yesterday.
The central bank cut reserve requirements for lenders by 75 basis points on March 9 to ease a shortage of cash in the financial system as companies pay taxes this month. In the U.S., banks and treasuries bought more government and related debt in the first two months of 2012 than they did in all of 2011.
Indian notes have returned an annualized 17.5 percent this year, compared with Chinese securities that earned 1.1 percent and U.S. debt that lost 3.1 percent, according to Bank of America-Merrill Lynch data. Yields on rupee-denominated bonds will drop further as the central bank cuts its benchmark repurchase rate by 100 basis points in the fiscal year starting April, according to IDBI Bank Ltd. (IDBI) and IndusInd Bank Ltd.
‘High Amount’
“Government securities are very attractive, and with rate cuts expected, bank treasuries would be buying bonds,” N.S. Venkatesh, Mumbai-based head of treasury at state-run IDBI, said in an interview on March 9. “Sovereign yields are likely to fall further.”
Commercial lenders in the U.S. purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Federal Reserve data show.
India’s banks boosted holdings of government bonds by 415.3 billion rupees in the two weeks through Feb. 10, the largest increase since the period ended Oct. 7. Lenders hold a “high amount” of sovereign debt and need to reduce ownership, Reserve Bank of India Governor Duvvuri Subbarao said on March 9, when the monetary authority cut reserve requirements to 4.75 percent.
The yield on India’s benchmark bonds rose one basis point, or 0.01 percentage point, to 8.31 percent today, before tomorrow’s government data that economists predict will show inflation accelerated to 6.7 percent in February from 6.6 percent the month before. The increase in yield pared the drop for this year to 27 basis points. Yields on similar-maturity securities have climbed 11 basis points in China (CTCNY10Y) in 2012 and 16 basis points in the U.S (USGG10YR).
Slowing Economy
Credit growth at Indian banks is slowing as lenders put more money into government bonds. Loans rose 15.6 percent in the year through Feb. 24, the least since 12 months through January 2010, according to central bank data.
Rupee-denominated debt will rally further as a stalling economy prompts policy makers to cut the repurchase rate by 50 basis points in 2012, according to state-owned Bank of India. Gross domestic product rose 6.1 percent in three months through December, the least since the first quarter of 2009, according to government data.
“It is reasonable to position oneself with expectations that rate reductions will start soon,” N. Seshadri, a Mumbai- based executive director at Bank of India, said in an interview yesterday. “The present level of interest rates aren’t helping achieve sustainable growth.”
Bank Borrowings
The rally in bonds is attracting global funds, which have boosted their holdings of Indian debt every month since October. They have raised their ownership by $5.1 billion in 2012, spurring gains in the rupee. The currency strengthened 0.1 percent to 49.9250 per dollar today. The rupee has rebounded 6.3 percent this year after slumping 16 percent in 2011, the worst performance in Asia.
Cash availability at lenders has worsened on speculation the central bank kept buying rupees to stem the decline in the currency. Banks borrowed an average 1.33 trillion rupees a day from the Reserve Bank this month, more than double the 600 billion-rupee limit favored by the monetary authority.
The shortage of funds is likely to persist as Finance Minister Pranab Mukherjee will announce a higher borrowing program for the fiscal year starting April when he unveils the federal budget on March 16, according to FirstRand Ltd., a unit of South Africa’s second-largest banking group. The government increased its borrowing plan by 23 percent in the current fiscal year as revenue dropped because of slowing economic growth.
‘Likely to Persist’
“The market seems to be pricing in repo-rate reductions starting as early as April,” Krishnamurthy Harihar, a Mumbai- based treasurer at FirstRand, said in an interview on March 9. “However, with the likelihood of a large and front-loaded government borrowing program next fiscal year, liquidity tightness is likely to persist and yields are unlikely to fall much.”
The 10-year yield could stay at about 8.25 percent “for the coming months,” he predicted.
The cost of protecting the debt of State Bank of India (SBIN) against default has slid this year. Credit-default swaps on the lender, which some investors consider a proxy for the sovereign, have fallen to 319 basis points from 395 basis points at the end of last year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value should a company fail to adhere to its agreements.
The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has narrowed to 626 basis points from a record 697 basis points touched in November.
“Government bonds are going to be a good investment proposition,” Indian Overseas Bank’s Narendra said in a telephone interview. “Yields have priced in most of the risks and they are above where they should be. I expect a slide.”
To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Sunday, March 11, 2012
India’s Industrial Output Growth Beats Estimates, Spurring Sensex Advance
India’s Industrial Output Rises at Fastest Pace in Seven Months
By Kartik Goyal - Mar 12, 2012
India’s industrial production rose at the fastest pace in seven months in January, weathering the highest interest rates since 2008 and weaker global growth.
Output at factories, utilities and mines advanced 6.8 percent from a year earlier, after a revised 2.5 percent climb in December, the Central Statistical Office said in a statement in New Delhi today. The figure exceeded all 26 estimates in a Bloomberg News survey.
The gain signals production is withstanding the impact of the elevated cost of credit on domestic demand and the fallout for exports from Europe’s debt crisis. India’s central bank, which moved to inject cash into the economy last week and reviews rates on March 15, has signaled readiness to join nations from Brazil to the Philippines in cutting borrowing costs as inflation eases.
“Notwithstanding today’s data, which has been quite volatile, growth is likely to remain weak in the coming quarters,” said N.R. Bhanumurthy, a New-Delhi based economist at the National Institute of Public Finance and Policy. “The RBI will be watching inflation data more closely to decide on its rate moves.”
The rupee weakened 0.2 percent to 49.9775 per dollar at 11:10 a.m. local time. It has rebounded 6.2 percent so far in 2012 after sliding 16 percent last year, the worst fall in Asia. The BSE India Sensitive Index rose 0.7 percent. The yield on the 8.79 percent note due November 2021 rose three basis points, or 0.03 percentage point, to 8.29 percent after the report.
Deteriorating Outlook
Policy gridlock and fiscal and trade deficits have fanned concern that the outlook for Asia’s third-largest economy is deteriorating.
Finance Minister Pranab Mukherjee presents the budget for the year through March 2013 the day after the Reserve Bank of India assesses rates. The central bank has signaled steps to tackle price pressures by paring the fiscal gap can boost its scope to cut borrowing costs.
India’s gross domestic product rose 6.1 percent last quarter from a year earlier, the slowest pace since 2009. It climbed 8.4 percent in each of the last two fiscal years.
The Reserve Bank raised its repurchase rate by a record 3.75 percentage points from March 2010 to October 2011, to 8.5 percent, to restrain the cost of living in a nation where more than two-thirds of the population live on less than $2 per day.
Easing Inflation
Inflation held at close to the lowest level in 26 months in February, with the wholesale-price index gaining 6.7 percent from a year earlier, according to a Bloomberg survey.
That would still be the fastest pace in the so-called BRIC group of economies that also includes Brazil, Russia and China. This year’s 17 percent climb in the price of Brent crude oil, the benchmark for almost all of India’s imports, threatens to spur price rises.
“Growth is slowing and at the same time there are fresh risks to inflation from rising crude oil prices,” said Radhika Rao, an economist at Forecast Pte in Singapore.
Steel production by companies including Tata Steel Ltd., India’s biggest producer of the alloy, declined 2.9 percent in January from a year earlier, compared with an 8.7 percent gain in December, according to commerce ministry data. Electricity output gained 2.4 percent, easing from an 8.9 percent pace.
The Reserve Bank reduced the amount of deposits lenders need to set aside as reserves on March 9, to 4.75 percent from 5.5 percent, saying the cut will add 480 billion rupees ($9.6 billion) into lenders. The bank last reduced the ratio on Jan. 24, by 0.5 percentage point, as it strives to ease a cash squeeze.
Indian officials are under pressure to revive growth. Prime Minister Manmohan Singh is trying to preserve an economic turnaround that began in the 1990s, when as finance minister he helped engineer a shift toward free-market policies. Singh’s ruling Congress party was recently routed in regional elections.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
By Kartik Goyal - Mar 12, 2012
India’s industrial production rose at the fastest pace in seven months in January, weathering the highest interest rates since 2008 and weaker global growth.
Output at factories, utilities and mines advanced 6.8 percent from a year earlier, after a revised 2.5 percent climb in December, the Central Statistical Office said in a statement in New Delhi today. The figure exceeded all 26 estimates in a Bloomberg News survey.
The gain signals production is withstanding the impact of the elevated cost of credit on domestic demand and the fallout for exports from Europe’s debt crisis. India’s central bank, which moved to inject cash into the economy last week and reviews rates on March 15, has signaled readiness to join nations from Brazil to the Philippines in cutting borrowing costs as inflation eases.
“Notwithstanding today’s data, which has been quite volatile, growth is likely to remain weak in the coming quarters,” said N.R. Bhanumurthy, a New-Delhi based economist at the National Institute of Public Finance and Policy. “The RBI will be watching inflation data more closely to decide on its rate moves.”
The rupee weakened 0.2 percent to 49.9775 per dollar at 11:10 a.m. local time. It has rebounded 6.2 percent so far in 2012 after sliding 16 percent last year, the worst fall in Asia. The BSE India Sensitive Index rose 0.7 percent. The yield on the 8.79 percent note due November 2021 rose three basis points, or 0.03 percentage point, to 8.29 percent after the report.
Deteriorating Outlook
Policy gridlock and fiscal and trade deficits have fanned concern that the outlook for Asia’s third-largest economy is deteriorating.
Finance Minister Pranab Mukherjee presents the budget for the year through March 2013 the day after the Reserve Bank of India assesses rates. The central bank has signaled steps to tackle price pressures by paring the fiscal gap can boost its scope to cut borrowing costs.
India’s gross domestic product rose 6.1 percent last quarter from a year earlier, the slowest pace since 2009. It climbed 8.4 percent in each of the last two fiscal years.
The Reserve Bank raised its repurchase rate by a record 3.75 percentage points from March 2010 to October 2011, to 8.5 percent, to restrain the cost of living in a nation where more than two-thirds of the population live on less than $2 per day.
Easing Inflation
Inflation held at close to the lowest level in 26 months in February, with the wholesale-price index gaining 6.7 percent from a year earlier, according to a Bloomberg survey.
That would still be the fastest pace in the so-called BRIC group of economies that also includes Brazil, Russia and China. This year’s 17 percent climb in the price of Brent crude oil, the benchmark for almost all of India’s imports, threatens to spur price rises.
“Growth is slowing and at the same time there are fresh risks to inflation from rising crude oil prices,” said Radhika Rao, an economist at Forecast Pte in Singapore.
Steel production by companies including Tata Steel Ltd., India’s biggest producer of the alloy, declined 2.9 percent in January from a year earlier, compared with an 8.7 percent gain in December, according to commerce ministry data. Electricity output gained 2.4 percent, easing from an 8.9 percent pace.
The Reserve Bank reduced the amount of deposits lenders need to set aside as reserves on March 9, to 4.75 percent from 5.5 percent, saying the cut will add 480 billion rupees ($9.6 billion) into lenders. The bank last reduced the ratio on Jan. 24, by 0.5 percentage point, as it strives to ease a cash squeeze.
Indian officials are under pressure to revive growth. Prime Minister Manmohan Singh is trying to preserve an economic turnaround that began in the 1990s, when as finance minister he helped engineer a shift toward free-market policies. Singh’s ruling Congress party was recently routed in regional elections.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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