Bloomberg News

Rupee Bond Sales Double as Rate Pressure Eases: India Credit

December 01, 2011

Dec. 1 (Bloomberg) -- Indian companies more than doubled rupee bond sales in November and top underwriters predict more issuance in coming months as slowing economic growth eases pressure on the central bank to raise interest rates.

Sales surged to 103.3 billion rupees ($1.98 billion) last month from a six-month low of 47.3 billion rupees in October, according to data compiled by Bloomberg. HSBC Holdings Plc, the nation’s biggest rupee-denominated bond arranger in November expects issuance to increase this month. Debt sales will exceed 300 billion rupees in the first quarter of 2012, according to ICICI Securities Primary Dealership Ltd., the third-biggest underwriter this year.

Five-year funding costs for companies rated AAA by Standard & Poor’s Indian unit Crisil Ltd. fell 16 basis points to 9.65 percent in the past three weeks, according to data compiled by Bloomberg. The drop comes after the central bank indicated it may hold rates this month after seven increases in 2011. Yields on similarly rated bonds in China increased 27 basis points to 5.15 percent, while those on top-rated U.S. notes rose eight to 1.65 percent, according to Bank of America Merrill Lynch and Chinabond indexes.

“The slowdown in economic growth will ease rates and because of this bond sales will likely pick up further in December,” Hari Das Khunteta, the New Delhi-based director of finance at Rural Electrification Corp., the second-largest issuer of rupee bonds in November, said in a phone interview yesterday. “Companies need more funding for growth, which is possible if rupee interest rates ease further.”

Growth Slows

Khunteta spoke after the Indian government said the economy grew at its slowest pace in more than two years in the three months through September. Gross domestic product rose 6.9 percent, the weakest expansion since the second quarter of 2009, a report yesterday showed.

The extra yield investors demand to hold AAA rated five- year corporate bonds rather than similar-maturity government debt rose 13 basis points, or 0.13 percentage point, in November to 75 basis points yesterday. The spread has ranged this year from 132 on Feb. 23 to 61 on Nov. 8.

Indian authorities are trying to limit the effect on the economy of Europe’s debt crisis while curbing inflation, which topped 9 percent for the 11th month in October. Indian price growth is almost twice the rate in China and higher than in Brazil and Russia. The Reserve Bank of India increased its benchmark rate to 8.5 percent from 8.25 percent on Oct. 25.

Rate Increase Pause

The Reserve Bank said its rate increases will help curb inflation and that the chances it will boost rates further at its Dec. 16 policy meeting are “relatively low.” The U.S. Federal Reserve has kept rates near zero since 2008.

“Expectations for inflation to ease suggest that policy rates will remain unchanged, which would prevent hardening of rates and encourage more borrowing in rupees,” Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary Dealership, said in a Nov. 28 phone interview.

The benchmark wholesale-price index jumped 9.73 percent in October from a year earlier, after rising 9.72 percent in September. In a sign that inflation may be easing, food prices rose at their slowest pace in almost four months in the week ended Nov. 12, increasing 9.01 percent.

“With growth having slipped below 7 percent, growth concerns are likely to dominate more strongly than ever before,” said Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc. said in a phone interview yesterday. “We expect the RBI will start reducing rates in the April TO June quarter, once inflation falls to a more comfortable level.”

Rupee Weakening

Any further weakening in India’s rupee could complicate the central bank’s outlook on interest rates. The weak currency puts pressure on prices by raising the cost of imported goods. The currency has dropped 14.4 percent against the dollar this year, the worst performance among Asia’s 10 most traded currencies.

The rupee declined 0.4 percent yesterday to 52.21 per dollar in Mumbai, according to data compiled by Bloomberg. The currency reached a record-low 52.73 on Nov. 22.

Housing Development Finance Corp., the country’s largest mortgage lender, and state-run lender Rural Electrification Corp. led the increase in bond sales last month. Issuance fell short of the monthly average for 2011 of 130.6 billion rupees.

Indian companies’ costs to borrow in dollars rose to 6.57 percent yesterday, down from a two-year high of 6.99 percent on Oct. 6. The premium demanded by investors to hold Indian debt denominated in the U.S. currency touched a two-year high of 626 basis points on Oct. 6, according to HSBC Holdings Plc indexes.

The only international debt sale this quarter was a 650 million yuan ($102 million) bond sold by state-backed lender IDBI Bank Ltd. on Nov. 11, according to data compiled by Bloomberg.

Open-Market Auction

India’s 10-year government bonds rose the most in more than three weeks yesterday after the central bank said it would buy government debt at an open-market auction this week. The yield on the 8.79 percent notes due in November 2021 fell nine basis points to 8.74 percent, according to the central bank’s trading system.

The country’s bonds returned 3.4 percent this year, the worst performance among 10 Asian local-currency debt markets monitored by HSBC, as inflation crimped earnings for investors.

The average cost for credit-default swaps insuring against non-payment on the debt of seven Indian companies has dropped 21 basis points this quarter to 420 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.

Capital Controls

The government last month raised the limit on rupee debt foreigners can purchase. The Finance Ministry increased the cap on government and corporate bonds by $5 billion each to $15 billion and $45 billion respectively, Thomas Mathew, joint secretary in charge of capital markets, told reporters in New Delhi on Nov. 17.

Prime Minister Manmohan Singh is aiming to double investment in public works and utilities to $1 trillion in the next five years, in an effort to catch up with infrastructure development in China.

“There were a flurry of bond transactions this month as some underwriters were buying debt in anticipation of the increase in the limit for foreign investors,” SJ Balesh, senior director at Infrastructure Development Finance Corp. said in a phone interview on Nov. 29. “The buyers are trying to see whether they can allocate debt to foreign investors” up to the new limits, Balesh said.

--With assistance from Kartik Goyal in New Delhi. Editors: Andrew Monahan, Shelley Smith

To contact the reporter on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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