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Best BRIC Bond Gain Spurred by Rate-Halt Forecast: India Credit

December 15, 2011

Dec. 15 (Bloomberg) -- Indian bonds are outperforming debt of the largest emerging markets, cutting yields from a three- year high, as analysts predict the central bank will abandon interest-rate increases in response to a manufacturing slump.

Rupee-denominated notes returned 1.59 percent this month, JPMorgan & Chase Co. data show, as 10-year yields slid 26 basis points to 8.48 percent. Local-currency securities lost 0.2 percent in Brazil while returning 0.9 percent in China and 0.1 percent in Russia. All 13 economists in a Bloomberg survey predict that the Reserve Bank of India will hold the repurchase rate at a three-year high of 8.5 percent tomorrow.

Government bonds are poised for their best month since May 2010 even as the rupee slid to a record-low after factory output fell 5.1 percent in October, the first contraction since June 2009. DSP Blackrock Investment Managers and Credit Suisse Group AG predict that the Reserve Bank will cut rates in the first half of 2012 as inflation slows, joining central banks from Brazil to China in easing monetary policy.

“Given the significant risks to growth and early signs of inflation moderating, we think the RBI is done with rate tightening,” said Mahendra Jajoo, the Mumbai-based head of fixed-income investments at Pramerica Asset Managers. “The rally in bonds is expected to continue.”

Yield Estimates

Pramerica, a unit of Newark, New Jersey-based Prudential Financial Inc., predicts that yields on 10-year government bonds will drop to 8 percent by March, a level last seen in April this year. DSP Blackrock, the Indian venture of the world’s largest asset manager, and HSBC Holdings Plc see yields falling as low as 8.25 percent in the same period. The yield has retreated 52 basis points, or 0.52 percentage point, from a three-year high of 9 percent reached last month.

Annual gains in India’s wholesale-price index slowed to 9.11 percent in November from 9.73 percent in October, official data yesterday showed.

Slower inflation is spurring foreigners to invest in India’s bonds. Overseas funds boosted holdings of rupee- denominated government and corporate debt by $7.4 billion this year to a record $25 billion on Dec. 13, exchange data show. Investors still demand extra yield of 662 basis points to hold India’s 10-year notes instead of similar-dated U.S. Treasuries.

“Expectations for slower inflation and the RBI cutting rates in the coming year are an indication of good news for the bond market,” said Dhawal Dalal, the Mumbai-based head of fixed income at DSP Blackrock Investment Managers that oversees $3.8 billion in assets, said in an interview on Dec. 13. “The market has understood the RBI is likely to cut rates.”

Record Rate Increase

Reserve Bank Governor Duvvuri Subbarao has raised the repo rate by 375 basis points since March 2010 to curb inflation, the fastest round of rate increases on record in India. Subbarao last lifted the repo rate by 25 basis points on Oct. 25 and is the only policy maker in the biggest emerging markets to boost benchmark borrowing costs this quarter.

Brazil’s central bank has cut the Selic rate by a total 150 basis points since August to 11 percent, while the People’s Bank of China cut the reserve ratio for banks by 50 basis points from Dec. 5, the first reduction since 2008. Russia has kept its refinancing rate at 8.25 percent since May.

The probability of another increase in India’s repo rate at a Reserve Bank meeting this week is “relatively low,” the regulator said on Oct. 25, forecasting inflation will slow to 7 percent by March.

‘Dovish Tone’

The fixed payment to lock in Indian borrowing costs for a year using interest-rate swaps fell to 76 basis points below the repo rate this week, the most since 2009, as traders boost bets on rate cuts after the factory output report, data compiled by Bloomberg show.

“It would be a surprise not to see a markedly more dovish tone emerge” in the RBI’s announcement tomorrow, Robert Prior- Wandesforde, a Singapore-based economist at Credit Suisse, said in an interview on Dec. 12.

Ten-year bond yields, which jumped eight basis points yesterday, fell one basis point today. The rupee fell 1.1 percent to a record low of 54.305 per dollar in Mumbai. The currency’s 17.6 percent tumble this year, the worst performance among Asian currencies, is making imports costlier and threatening to fuel inflation.

“Inflation and wage expectations remain high and are likely to complicate any inclination the central bank may have to support growth,” Taimur Baig and Kaushik Das, Singapore- and Mumbai-based economists at Deutsche Bank AG, wrote in a report yesterday. “Unless growth and financial markets begin to deteriorate in a disorderly manner, the RBI is still three to four months away from taking major easing measures.”

‘Eminently Bankable’

The slide in the rupee won’t diminish investor confidence in India and the economy will return to a long-term growth pace of 9 percent, Prime Minister Manmohan Singh said in an interview in New Delhi yesterday.

Gross domestic product will expand 7.5 percent in the year ending March 31, while inflation will subside to between 6 percent and 7 percent, he said. Singh said he expects to succeed in his push to open the nation’s retail market to foreign companies after the end of regional elections by March 2012.

“We will stay the course,” Singh said in his office in Parliament House. “We will make India an eminently bankable and creditworthy economy.”

Open-Market Auctions

Government bonds are also rallying after the central bank resumed open-market purchases of sovereign debt last month for the first time since January to boost the amount of cash in the banking system. The monetary authority has purchased 243 billion rupees ($4.5 billion) of government debt in auctions over the past month, central bank data show.

“The bond market is being driven by the RBI’s debt purchases,” Manish Wadhawan, head of fixed-income trading in Mumbai at HSBC, said in an interview yesterday. “It will be clearer in the policy statement whether the RBI continues with its bond buying plan.”

The cost of protecting the debt of State Bank of India against non-payment for five years using credit-default swaps rose 35 basis points this month to 385 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. State Bank is viewed as a proxy for India by investors.

Extend Gains

Sovereign bonds may extend gains after the pace of lending growth at the nation’s banks slipped below that of deposit increases for the first time in seven quarters, boosting spare cash in the banking system. Loans rose 17.6 percent in the year through November, compared with an 18 percent increase in savings, central bank data show.

“With credit growth slowing banks will have to deploy the excess cash that they have elsewhere,” Diwakar Gupta, chief financial officer at Mumbai-based State Bank, the nation’s largest lender, said in an interview.

--With assistance from Anto Antony and Manish Modi in New Delhi and V Ramakrishnan in Mumbai. Editors: Anil Varma, Ven Ram

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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