Bloomberg News

Swaps Signal Subbarao Reversal as Slowdown Deepens: India Credit

November 29, 2011

Nov. 29 (Bloomberg) -- Reserve Bank of India Governor Duvvuri Subbarao may reverse Asia’s steepest increase in interest rates in the coming year as the third-largest developing economy slows, money-market indicators show.

The fixed payment to lock in borrowing costs for a year fell to 38 basis points below the central bank’s 8.5 percent repurchase rate, showing swap traders are betting on monetary easing, data compiled by Bloomberg show. Similar spreads were 45 basis points below benchmark rates in China and 180 in Brazil, the two biggest emerging markets. India’s economy probably grew 6.8 percent last quarter, the least in two years, according to the median estimate in a Bloomberg survey.

The Reserve Bank’s seven rate increases this year have caused bond sales by Indian companies to drop 22 percent as borrowing costs climb. Downgrades in corporate debt ratings are approaching upgrades for the first time since 2009, after earnings at 40 percent of firms in the benchmark stock index missed analysts’ estimates in the past quarter.

“The RBI will be required to reverse its monetary stance to avoid a hard landing,” Vivek Rajpal, a fixed-income strategist at Nomura Holdings Inc., Japan’s biggest brokerage, said in an interview on Nov. 28. “Growth is likely to slow further due to the impact of monetary tightening and headwinds from weakening demand in advanced countries.”

International investors pulled $798 million out of India’s bonds and stocks this month as banks including Morgan Stanley and Macquarie Group Ltd. cut forecasts for the nation’s economic growth, fueling the rupee’s tumble to a record low of 52.73 per dollar on Nov. 22. Local-currency notes underperformed debt across the region this year, returning 2.9 percent, compared with the 16.1 percent earned by Indonesian securities, according to indexes compiled by HSBC Holdings Plc.

Emerging Outliers

Subbarao is the only policy maker in the biggest emerging markets who increased borrowing costs this quarter, even as Europe’s debt crisis worsened.

The governor last raised the repo rate by 25 basis points, or 0.25 percentage point, on Oct. 25, taking the total increase since March 2010 to a record 375, the steepest surge among Asia’s 10 biggest economies. Brazil’s central bank has cut its Selic rate by a total 100 basis points since August to 11.5 percent, while Bank Indonesia lowered its reference rate by 75 since Sept. 30 to 6 percent.

The probability of another increase to the repo rate when policy makers next meet in December is “relatively low,” the central bank said last month, forecasting inflation will slow to 7 percent by March from 9.73 percent in October. Gains in the benchmark wholesale-price index will start slowing from this month, Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s Economic Advisory Council, said in Hyderabad, central-eastern India yesterday.

‘Peaking of Cycle’

“If we do see inflation rates coming off as we expect, we could be looking at the peaking of the cycle,” Reserve Bank Deputy Governor Subir Gokarn said on Nov. 11, referring to the monetary authority’s policy outlook. “Let me emphasize it’s a guidance, not a commitment. There are many risks to that scenario.”

Monetary easing will push the average worldwide central bank interest rate, weighted for gross domestic product, to 1.79 percent by next June from 2.16 percent in September, the largest drop in two years, according to data and projections compiled by JPMorgan Chase & Co., which tracks 31 central banks. The number of authorities loosening credit is the most since the third quarter of 2009, when 15 institutions cut rates, the data show.

‘Start Cutting Rates’

The cost of one-year swap contracts has remained below three-month rates since August. The difference widened by 19 basis points this month to 48 below the rate as economic data added to evidence the $1.7 trillion economy is slowing. The three-month swap is at 8.60 percent and the one-year contract at 8.11 percent.

“Swap spreads indicate we are at the peak of the policy- rate cycle,” said Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered Plc. “We expect the RBI to start cutting rates in the April-June quarter of next year.”

Ten-year government bond yields have retreated 14 basis points from a three-year high of 8.97 percent reached on Nov. 14, on speculation the RBI is close to halting rate increases. The yield on the 8.79 percent security due 2021 was little changed at 8.83 percent today. The extra yield demanded on the Indian bonds over similar-dated U.S. debt has narrowed to 684 basis points, from a 12-year high of 697 touched on Nov. 9.

Default Swaps

The average cost for credit-default swaps insuring against non-payment on the debt of seven Indian companies has dropped 25 basis points this quarter to 416 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

India’s factory output rose 1.9 percent in September from a year earlier, the smallest advance in two years, official data showed on Nov. 11. Merchandise exports grew 10.8 percent in October from a year earlier, the least since 2009, as waning demand in Europe cut orders, Commerce Secretary Rahul Khullar said on Nov. 8. The RBI last month reduced its forecast for economic growth in the year ending March 31 to 7.6 percent, from 8 percent.

As Bad as 2008

“We expect further significant deceleration in domestic demand and a slowdown in exports are likely to take GDP growth lower,” Chetan Ahya, a Hong Kong-based economist at Morgan Stanley, said yesterday. “The coming growth slowdown is going to be as deep as during the credit crisis” of 2008, he said.

New York-based Morgan Stanley cut its growth estimate for India yesterday to 7 percent from 7.2 percent for the year to March. Nomura Holdings, Japan’s biggest brokerage, lowered its forecast in October to 7.2 percent from 7.7 percent.

Increases in debt ratings for companies by Crisil Ltd., the Indian unit of Standard & Poor’s, fell to 12 for every 10 cuts, the worst ratio since the same period of 2009, data compiled by Bloomberg show. Credit downgrades may accelerate in the rest of the year to March on increased funding costs and a slowdown in demand, according to Crisil and Mumbai-based ratings provider Credit Analysis & Research Ltd.

Subbarao may delay any pause in monetary tightening as the rupee’s 14 percent tumble this year, the worst performance among Asian currencies, fuels inflation by making imports costlier, according to Dun & Bradstreet Information Services India Pvt. The rupee was little changed at 51.95 per dollar today.

‘Reignite’ Inflation

“The sharp slide in the rupee threatens to reignite inflation pressures and will make it difficult for the Reserve Bank to stop tightening,” Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet, said in an interview yesterday. “The RBI has to walk a tight rope with growth slowing and inflation still holding near double digits.”

Singh predicts that the central bank will boost the repo rate by 25 basis points to 8.75 percent at the Dec. 16 policy meeting.

“The slowdown message is likely to be loud and clear when we receive the latest GDP data,” Jay Shankar, Mumbai-based chief economist at Religare Capital Markets Ltd. said in an interview yesterday. “The growth slowdown will call for a pause in the RBI’s tightening cycle even though the sharp drop in the rupee is likely to put short-term pressure on inflation.”

--With assistance from Manish Modi in New Delhi. Editors: Anil Varma, Sandy Hendry

To contact the reporter on this story: Kartik Goyal in New Delhi at

To contact the editors responsible for this story: Sandy Hendry at; Stephanie Phang at

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