Oct. 25 (Bloomberg) -- India’s stocks rose to a three-month high and government bonds rallied the most in seven weeks as the central bank signaled it is nearing the end of the nation’s most aggressive credit-tightening on record.
The rupee, Asia’s worst-performing currency this year, rose the most in two weeks as the Reserve Bank of India boosted its benchmark rate for the 13th time since March 2010, as predicted by 18 of 28 economists surveyed by Bloomberg. Ten expected no change. Today’s policy decision will help temper inflation and leave room for economic growth to improve, Finance Minister Pranab Mukherjee said in New Delhi today.
“Finally, there’s light at the end of a long tunnel,” said Aneesh Srivastava, Mumbai-based chief investment officer at IDBI Federal Life Insurance Co. that oversees about $427 million. “The RBI has started reacting on signs of retardation in domestic growth, global economic uncertainties and high-base effect of inflation that would kick in from December.”
The BSE India Sensitive Index, or Sensex, surged 315.58, or 1.9 percent, to 17,254.86, its highest level since Aug. 5, at the close in Mumbai. The S&P CNX Nifty Index on the National Stock Exchange of India Ltd. gained 1.8 percent to 5,191.60. The BSE 200 Index climbed 1.5 percent to 2,098.18.
The yield on the 7.8 percent notes due April 2021 fell six basis points, or 0.06 percentage point, to 8.76 percent in Mumbai, according to the central bank’s trading system. The yield reached 8.82 percent yesterday, the highest closing level for rates on benchmark 10-year bonds since August 2008, according to data compiled by Bloomberg.
The rupee strengthened 0.7 percent to 49.5075 per dollar in Mumbai, according to data compiled by Bloomberg. That is the biggest advance since Oct. 12.
The odds of a rate increase at the next policy review on Dec. 16 are “relatively low,” the Reserve Bank said after boosting the repurchase rate to 8.5 percent from 8.25 percent today. It reiterated a prediction that inflation will slow to 7 percent by March from 9.72 percent in September and lowered growth estimate for Asia’s third-largest economy in the fiscal year through March to 7.6 percent from 8 percent earlier.
“We are at the peak of the rate tightening cycle,” said Sri Prasad Prabhu, Mumbai-based head of fixed-income at IDBI Federal Life Insurance Co. “Even if inflation is above the central bank’s estimate, with a declining trend, there will be less pressure to tighten the policy. I would expect the Reserve Bank will hold rates until March 2012.”
Consumer demand in India has slowed as RBI Governor Duvvuri Subbarao lifted the repo rate by a total 375 basis points in this cycle of monetary tightening. Manufacturing grew in September at the slowest pace in 2 1/2 years, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics. India’s automakers cut this month their forecast for growth in car sales for a second time this year.
Mahindra & Mahindra Ltd., the country’s largest maker of sport-utility vehicles and tractors, reached a record today, setting off a rally among its peers on speculation sales will improve as interest rates near a peak. Larsen & Toubro Ltd., the biggest engineering company, climbed for the first time in four days. HDFC Bank Ltd., the largest non-state lender by value, tumbled the most a month after the central bank allowed lenders to set rates on savings deposits.
Mahindra advanced 5.4 percent to a record 853.85 rupees. Maruti Suzuki India Ltd., the biggest carmaker, rallied for a fifth day, gaining 3.5 percent to 1,151.25 rupees. Larsen rose 3.3 percent to 1,337.05 rupees, ending a three-day, 7.6 percent decline. The BSE India Capital Goods Index advanced 1.9 percent to 10,511.03. The gauge has plunged 34 percent in the past 12 months to its lowest level in more than two years.
HDFC Bank plunged 3.4 percent to 468 rupees, its steepest slide since Sept. 22, after the central bank said it will let lenders set rates on savings deposits, a move that may narrow margins as competition for funds drive up costs.
“While this is surely a Diwali gift for bank customers, it is one more body blow for the banking system to handle,” said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.
Banks currently pay an interest of 4 percent annually on the savings accounts. An increase in the rate by 1 percentage point will lead to an additional outgo of about 145 billion rupees, or 13 percent of the combined earnings before tax of all banks in the year ended March 31, SMC said in a report today.
State Bank of India, the nation’s biggest lender, sank 3.6 percent to 1,839.8 rupees. The Bankex index, which tracks 14 lenders, slid to its lowest in about two weeks.
‘Good’ for Rupee
While the RBI’s forecast for a moderation in inflation is “good” for the rupee, international factors such as Europe’s debt crisis will remain a major driver of the currency, said Paul Mackel, Hong Kong-based head of Asian currency research at HSBC. The currency lost 9.7 percent this year. The central bank won’t use the exchange rate to temper inflation, Governor Subbarao told reporters in Mumbai today.
India’s inflation rate, which has stayed above 9 percent since December, will rise to 10.2 percent from a year earlier in November, according to Skandinaviska Enskilda Banken AB.
“We maintain our view that, by March 2012, the RBI will raise the repo rate to 9 percent,” Sailesh K. Jha, head of Asia strategy at SEB in Singapore, wrote in a report published today. “In our view, if the RBI doesn’t continue hiking the repo rate it will continue to fall behind the inflation curve.”
Overseas investors bought a net $29.4 million of Indian stocks on Oct. 24, data on the website of the regulator show. Stock exchanges are closed tomorrow and Oct. 27 for public holidays.
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, fell 15 basis points to 8.16 percent as investors pared bets for further rate increases, according to data compiled by Bloomberg. That is the biggest drop this month. Five-year contracts fell eight basis points to 7.38 percent.
Short-dated swaps will continue to fall faster as the central bank prepares to halt additions to borrowing costs, according to Vivek Rajpal, a fixed-income strategist at Nomura Holdings Inc. The central bank may buy bonds from the market to boost cash at banks and help the government successfully complete its borrowing program, driving yields further lower, according to Nomura.
“Since the RBI has clearly mentioned it will manage liquidity to ensure it remains in moderate deficit, I expect them to conduct open-market operations at the end of November or early December when liquidity conditions will be outside the comfort zone,” Mumbai-based Rajpal said.
--Editors: Ravil Shirodkar, Anil Varma
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