Bloomberg News

Bonds Slump Most in 15 Months on Deficit Setback: India Credit

June 06, 2011

June 6 (Bloomberg) -- India’s corporate bond market is signaling that the government will fail to meet its target of cutting the budget deficit to a four-year low.

The yield on Steel Authority of India Ltd.’s 8.8 percent securities due in October 2016 surged 22 basis points, or 0.22 percentage point, last week to 9.79 percent as the state-owned company deferred its stock sale. The rates on the notes of Oil & Natural Gas Corp. and Indian Oil Corp., other companies in which the government plans to reduce stakes, touched the highest level in 16 months on growing concerns they won’t be able to sell shares this year.

Corporate bonds are bearing the brunt of investor concerns that the government will fail to raise $9 billion from asset sales by March 31 to cut the budget gap to 4.6 percent of gross domestic product. Sovereign notes, which ended the longest stretch of declines in 14 months last week, slid 1.4 percent this quarter, according to Bank of America-Merrill Lynch. Yields on 10-year bonds of 8.3 percent are more than double the U.S. rate and the highest among the so-called BRIC countries.

“There is no appetite at the moment for share sales as market sentiment is very poor,” Killol Pandya, who manages the equivalent of $300 million as the Mumbai-based head of fixed income at Daiwa Mutual Fund, said in an interview on June 2. “The government will definitely miss the disinvestment target and that’s bad for the fiscal deficit.”

Revenue, Expenses

India’s benchmark Sensitive Index of shares has slid 10.6 percent this year, the worst performance in Asia after Vietnam, posing a challenge to fresh equity sales. Steel Authority is “waiting for the market to stabilize,” Chairman C.S. Verma said in an interview on June 1, when the plan was shelved. The government aimed to sell a 5 percent stake in the nation’s second-biggest producer, boosting state revenue by about $672 million, based on closing prices on June 3.

The government’s budget, which assumed a 38 percent drop in energy subsidies, has come under pressure from rising oil prices, Reserve Bank of India Governor Duvvuri Subbarao told reporters last month. This year’s budget-deficit target is “difficult to achieve,” Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told reporters in Mumbai on June 2.

Growth Slows

India’s 10-year bonds completed their first weekly rally since April on June 3 after official data on May 31 showed the economy expanded 7.8 percent in the three months to March, the least since the quarter ended December 2009. The yield on the government’s 7.8 percent bonds due in April 2021 dropped 19 basis points last week to 8.27 percent, according to the central bank’s trading system. The rate was little changed today.

“The delay in the disinvestment process will certainly not give confidence to deficit hawks,” Ritesh Jain, the Mumbai- based head of investments at Canara Robeco Asset Management Ltd. that oversees $2.2 billion said in an interview on June 3. “Slowing GDP growth will also reduce tax collections. It’s a double whammy with expenditure expected to go up and revenue collections coming down.”

The 10-year bond yield will rise to between 8.5 percent and 8.8 percent by September if oil prices remain at about $100 a barrel in New York, he said.

Corporate Yields

The difference between India’s notes due in a decade and similar-maturity U.S. bonds has widened to 529 basis points from 463 at the end of last year. Rupee debt returned 0.9 percent this year, the second-worst performance among 10 Asian local- currency debt markets outside Japan tracked by HSBC Holdings Plc.

In the corporate bond market, the difference in yields between India’s top-rated three-year rupee debt and similar- maturity government bonds has more than doubled to 205 basis points, from 83 a year earlier.

D.H. Pai Panandiker, president of RPG Foundation, an economic policy group in New Delhi, said the government still has time to carry out its share sales.

“It is too early to assume that share sale target will be missed, we are only in the first quarter,” he said. “I expect market sentiment to improve from September.”

The yield on the 8.54 percent notes of ONGC Videsh Ltd., a unit of the explorer, rose 41 basis points to 9.61 percent this quarter, according to data compiled by Bloomberg.

The rate reached 9.63 percent on May 31, the highest level since the securities were issued in January 2010. The yield on Indian Oil’s 11 percent bond due in September 2018 has climbed 42 basis points since March 31 to 9.88 percent. The rate touched 9.94 percent on May 27, the highest since October 2009.


“If the funds are not going to be mobilized through the equity route, then the companies’ debt burden will increase,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview on June 3. “Bond yields of these companies are simply reflecting sentiment from deferment of the share sales.”

The rupee has dropped 0.25 percent this year, the worst performance among Asia’s most-traded currencies after the Thai baht, as global funds sold $53 million more Indian shares than they bought. The currency traded at 44.74 per dollar today, according to data compiled by Bloomberg.

The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, increased 20 basis points this year to 181, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

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.

“I am very worried about the fiscal position,” Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore, said in an interview on June 3. “When growth is slowing and the equity markets are not doing well, selling shares of state firms is a challenge.”

--With assistance from Anil Varma and Anurag Joshi in Mumbai. Editors: Ven Ram, Arijit Ghosh

To contact the reporter on this story: Rakteem Katakey in New Delhi at Unni Krishnan in New Delhi at

To contact the editor responsible for this story: Amit Prakash at Stephanie Phang at

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