Bloomberg News

Subbarao Copying Bernanke Excites Demand for Bonds

June 22, 2012

Demand for India’s sovereign bonds has climbed to a two-year high as central bank Governor Duvvuri Subbarao prepares to mirror Federal Reserve Chairman Ben S. Bernanke in buying bonds to revive economic growth.

The monetary authority plans to purchase 120 billion rupees ($2.1 billion) of notes from the market today, while the government will issue 150 billion rupees at a weekly sale. Benchmark 10-year securities attracted bids that on average were 2.44 times the amount offered at auctions this quarter, the most since Bloomberg calculations going back to April 2010. The similar bid-cover ratio was 1.7 times in China. The yield on rupee-denominated bonds due 2022 has fallen 50 basis points this quarter to 8.04 percent.

Subbarao is acting two days after Bernanke extended buying of longer-dated debt to lower the cost of business investment and home buying. Investors in Asia’s third-biggest economy are seeking the safest assets as the BSE India Sensitive Index of shares is headed for a quarterly drop after gross domestic product increased the least in nine years in the three months through March.

“The RBI is killing a lot of birds with one stone by buying bonds,” Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc., said in an interview yesterday. “The liquidity injection is helping support growth as well as the government’s debt-sale program.”

Operation Twist

The Fed will extend its Operation Twist that was to have expired this month through to the end of 2012, Bernanke said this week after two days of deliberations among policy makers. Under the program, the monetary authority is selling $400 billion of short-term government debt and replacing it with the same amount of longer-term Treasuries to reduce borrowing costs and spur the world’s largest economy.

The Reserve Bank has bought 433 billion rupees of bonds from the market in the first quarter of the year that began April 1 to inject cash into the economy, about 33 percent of the amount it bought in the prior 12 months. The central bank will purchase 1.3 trillion rupees more of bonds in the remainder of the fiscal year, according to Nomura, while Barclays Plc predicts the amount will be 1 trillion rupees.

Subbarao also cut the benchmark repurchase rate by 50 basis points in April, the first reduction in three years. Gross domestic product rose 5.3 percent in the first quarter, compared with 6.1 percent in the previous three months, a government report said May 31. The monetary authority has lowered the amount of cash that banks need to set aside by 125 basis points in 2012 to free up funds for lending.

Debt Sales

Prime Minister Manmohan Singh’s administration plans to increase debt sales by 12 percent to a record 5.69 trillion rupees this fiscal year to bridge its budget deficit. The government is aiming to narrow the shortfall in its finances to 5.1 percent of GDP from 5.76 percent in the year ended March.

The yield on the nation’s 10-year bonds, which rose 13 basis points in April after the finance ministry announced its borrowing plan, fell in May as the central bank started its open-market operations. It decreased two basis points, or 0.02 percentage point, to 8.04 percent today, taking the drop for June to 46 basis points. The benchmark yield is just two basis points below that on one-year debt.

Today’s sale of bonds by the finance ministry will be longer-dated securities due in 2020, 2024, 2027 and 2041, according to a central bank statement on June 18, giving the government more time to repay debt.

Bond Performance

“The Reserve Bank’s purchases will support sentiment in the bond market,” Kumar Rachapudi, a Singapore-based interest- rate strategist at Barclays, said in an interview on June 20. “The 10-year yield will drop to 7.5 percent in three months.”

The slide in yields is boosting investor returns, with rupee-denominated notes earning 4.58 percent this year, the best performance among 10 Asian markets monitored by HSBC Holdings Plc.

The Sensex fell 0.5 percent to 16,951 today. It has dropped 2.6 percent this quarter. The stock gauge has fallen in four of the past five quarters.

While the Reserve Bank is making sure that companies have sufficient funds for expansion, the government needs to play its part to ensure economic growth, according to Mumbai-based Yes Bank Ltd. (YES)

“Investors will wait for cues from the government before making fresh commitments as the RBI’s actions alone can’t drive growth higher,” Shubhada Rao, the Mumbai-based chief economist at Yes Bank, said in an interview yesterday. “You need complementary actions between the monetary and fiscal sides.”

Bond Risk

The $1.7 trillion economy will grow 6.5 percent this fiscal year with “downside risks,” according to Rao.

The cost of protecting the debt of State Bank of India (SBIN) against default is climbing. Five-year credit-default swaps on the state-owned lender cost 372 basis points yesterday, having increased 32 basis points this quarter, according to CMA, which is owned by CME Group Inc. and compiles prices quoted in privately negotiated markets. Some investors consider the lender, the nation’s largest, a proxy for the sovereign. The swaps pay face value if a company fails to adhere to debt terms.

Other central banks around the world are also considering steps to spur their economies. Bank of England Governor Mervyn King and three other policy makers were overruled this month as they pushed to expand their bank’s bond-purchase program, meeting minutes showed this week. European Central Bank President Mario Draghi left the door open for a rate cut at a June 6 press conference.

Call Rate

Bond purchases from the market have “substantially eased” the availability of cash, the central bank said this week after a monetary-policy review. The call-money rate, at which banks borrow from one another overnight, has slumped 75 basis points from this quarter’s high of 8.95 percent reached on April 7.

India’s economy will recover in the coming quarters, with GDP expanding between 6.3 percent and 6.5 percent this fiscal year, according to Royal Bank of Scotland Group Plc.

“Given the current sluggish growth conditions, open-market operations may prove helpful for growth as it boosts money supply,” Gaurav Kapur, a Mumbai-based senior economist at Royal Bank of Scotland, said in an interview yesterday. “This also helps keep a lid on bond yields as the government has a record borrowing program.”

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

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


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