Bloomberg News

Sovereign Purchases Quadrupling Mimics U.S. Banks’ Holdings: India Credit

March 12, 2012

India’s banks have quadrupled purchases of government bonds to bring their total ownership to a record, undermining policy makers’ efforts to inject cash into Asia’s third-biggest economy.

Lenders, which bought 130 billion rupees ($2.6 billion) in the final three months of last year, added 522 billion rupees this quarter, taking holdings to 17.4 trillion rupees. Federal securities will be a “good investment proposition,” Indian Overseas Bank Chairman and Managing Director M. Narendra said in an interview from the southern Indian city of Chennai yesterday.

The central bank cut reserve requirements for lenders by 75 basis points on March 9 to ease a shortage of cash in the financial system as companies pay taxes this month. In the U.S., banks and treasuries bought more government and related debt in the first two months of 2012 than they did in all of 2011.

Indian notes have returned an annualized 17.5 percent this year, compared with Chinese securities that earned 1.1 percent and U.S. debt that lost 3.1 percent, according to Bank of America-Merrill Lynch data. Yields on rupee-denominated bonds will drop further as the central bank cuts its benchmark repurchase rate by 100 basis points in the fiscal year starting April, according to IDBI Bank Ltd. (IDBI) and IndusInd Bank Ltd.

‘High Amount’

“Government securities are very attractive, and with rate cuts expected, bank treasuries would be buying bonds,” N.S. Venkatesh, Mumbai-based head of treasury at state-run IDBI, said in an interview on March 9. “Sovereign yields are likely to fall further.”

Commercial lenders in the U.S. purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Federal Reserve data show.

India’s banks boosted holdings of government bonds by 415.3 billion rupees in the two weeks through Feb. 10, the largest increase since the period ended Oct. 7. Lenders hold a “high amount” of sovereign debt and need to reduce ownership, Reserve Bank of India Governor Duvvuri Subbarao said on March 9, when the monetary authority cut reserve requirements to 4.75 percent.

The yield on India’s benchmark bonds rose one basis point, or 0.01 percentage point, to 8.31 percent today, before tomorrow’s government data that economists predict will show inflation accelerated to 6.7 percent in February from 6.6 percent the month before. The increase in yield pared the drop for this year to 27 basis points. Yields on similar-maturity securities have climbed 11 basis points in China (CTCNY10Y) in 2012 and 16 basis points in the U.S (USGG10YR).

Slowing Economy

Credit growth at Indian banks is slowing as lenders put more money into government bonds. Loans rose 15.6 percent in the year through Feb. 24, the least since 12 months through January 2010, according to central bank data.

Rupee-denominated debt will rally further as a stalling economy prompts policy makers to cut the repurchase rate by 50 basis points in 2012, according to state-owned Bank of India. Gross domestic product rose 6.1 percent in three months through December, the least since the first quarter of 2009, according to government data.

“It is reasonable to position oneself with expectations that rate reductions will start soon,” N. Seshadri, a Mumbai- based executive director at Bank of India, said in an interview yesterday. “The present level of interest rates aren’t helping achieve sustainable growth.”

Bank Borrowings

The rally in bonds is attracting global funds, which have boosted their holdings of Indian debt every month since October. They have raised their ownership by $5.1 billion in 2012, spurring gains in the rupee. The currency strengthened 0.1 percent to 49.9250 per dollar today. The rupee has rebounded 6.3 percent this year after slumping 16 percent in 2011, the worst performance in Asia.

Cash availability at lenders has worsened on speculation the central bank kept buying rupees to stem the decline in the currency. Banks borrowed an average 1.33 trillion rupees a day from the Reserve Bank this month, more than double the 600 billion-rupee limit favored by the monetary authority.

The shortage of funds is likely to persist as Finance Minister Pranab Mukherjee will announce a higher borrowing program for the fiscal year starting April when he unveils the federal budget on March 16, according to FirstRand Ltd., a unit of South Africa’s second-largest banking group. The government increased its borrowing plan by 23 percent in the current fiscal year as revenue dropped because of slowing economic growth.

‘Likely to Persist’

“The market seems to be pricing in repo-rate reductions starting as early as April,” Krishnamurthy Harihar, a Mumbai- based treasurer at FirstRand, said in an interview on March 9. “However, with the likelihood of a large and front-loaded government borrowing program next fiscal year, liquidity tightness is likely to persist and yields are unlikely to fall much.”

The 10-year yield could stay at about 8.25 percent “for the coming months,” he predicted.

The cost of protecting the debt of State Bank of India (SBIN) against default has slid this year. Credit-default swaps on the lender, which some investors consider a proxy for the sovereign, have fallen to 319 basis points from 395 basis points at the end of last year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value should a company fail to adhere to its agreements.

The difference between India’s 10-year bonds and similar- maturity U.S. Treasuries has narrowed to 626 basis points from a record 697 basis points touched in November.

“Government bonds are going to be a good investment proposition,” Indian Overseas Bank’s Narendra said in a telephone interview. “Yields have priced in most of the risks and they are above where they should be. I expect a slide.”

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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