Bloomberg News

Singh Failure to Tame Inflation Cuts Bond Appeal: India Credit

August 12, 2012

Indian Central Bank Governor Duvvuri Subbarao

Central bank Governor Duvvuri Subbarao on July 31 refrained from cutting the highest borrowing costs among major Asian economies and raised his inflation forecast as the worst monsoon since 2009 threatens to boost food costs. Photographer: Dhiraj Singh/Bloomberg

Prime Minister Manmohan Singh’s failure to contain the worst inflation among the biggest emerging markets is making Indian debt less appealing compared with similarly-rated Asian bonds.

The benchmark price index rose 7.2 percent in July, exceeding 7 percent for a sixth month, economists predicted in a Bloomberg survey before data due tomorrow. Global funds added $585 million to holdings of Indian corporate and sovereign securities this quarter, 58 percent less than the $1.4 billion they invested in Indonesian government debt alone.

Central bank Governor Duvvuri Subbarao on July 31 refrained from cutting the highest borrowing costs among major Asian economies and raised his inflation forecast as the worst monsoon since 2009 threatens to boost food costs. Singh’s efforts to keep fuel and food affordable for two-thirds of India’s 1.2 billion people living on less than $2 a day may cause the government to overshoot its budget deficit target.

“Inflation moderation would be difficult in case the monsoon turns out to be bad,” Guilherme Maciel de Barros, a London-based fund manager at Lombard Odier Darier Hentsch & Cie, which manages $1 billion in emerging-market debt assets, said in an Aug. 9 e-mail. “India certainly has bigger challenges on the fiscal front and as a result debt issuance will continue to be a bigger problem than in Indonesia.”

The premium investors demand to hold Indian debt, rated Baa3 by Moody’s Investors Service, over Indonesian notes has surged 50 percent since June. Ten-year rupee-denominated bonds now yield 8.17 percent, 242 basis points more than comparable rupiah notes, data compiled by Bloomberg show. The spread has widened 80 basis points from an eight-month low on June 13.

Rising Risk

Bond risk in India has increased in the past year. The cost of insuring the debt of government-controlled State Bank of India, a proxy for the nation, climbed 81 basis points from a year ago to 311, according to data provider CMA. The average price of credit-default swaps for Asia’s 10 biggest economies dropped 10 basis points to 131 in the period.

The Reserve Bank’s Subbarao held the repurchase rate at 8 percent for a second straight review on July 31 and raised his inflation estimate for the year through March 2013 to 7 percent from 6.5 percent, citing inflation risks fueled by inadequate rainfall. The monetary authority also scaled back its estimate for economic expansion to 6.5 percent from 7.3 percent. Policy makers from Brazil to China and South Korea cut borrowing costs last month to spur economic growth.

Drought Looms

Inflation was 5.2 percent in Brazil, 1.8 percent in China, 5.6 percent in Russia and 4.6 percent in Indonesia last month, according to official figures.

India’s monsoon, which accounts for more than 70 percent of annual rainfall, was 17 percent below a 50-year average so far this year, the nation’s weather bureau said Aug. 7. Farm Minister Sharad Pawar has said India may be facing its worst drought since 1972, the Indian Express reported Aug. 5. There may be “major negative implications” for India’s farm output if rains don’t improve, the World Bank said in a July 30 report.

The prospect of a drought is prompting banks to cut forecasts for interest-rate cuts in India. Goldman Sachs Group Inc. now predicts the RBI will lower its repo rate by 25 basis points by year-end, after paring an earlier estimate for a 75 basis-point reduction. Morgan Stanley has scaled back its easing expectation to 50 basis points from 75, while Nomura Holdings Inc. sees no decline this year, after discarding a projection for a quarter percentage point drop.

‘Long Wait’

Citigroup Inc. on Aug. 7 lowered its rate-cut estimate to 50 basis points in the year through March 2013 from an earlier call for a reduction of as much as 75 basis points. The third- largest U.S. bank forecasts Indian inflation to average 8 percent in the current fiscal year.

Rising fuel prices are adding to gains in the benchmark wholesale-price index. Indian Oil Corp., the nation’s biggest refiner, raised gasoline prices July 23 for the first time in two months. Chakravarthy Rangarajan, chief economic adviser to Prime Minister Singh, said last month that he hopes the government will increase diesel prices “as early as possible.”

“Inflation is likely to edge higher due to risks from truant monsoons, weak rupee, oil prices and the fiscal deficit,” said Rohini Malkani, an economist at Citigroup in Mumbai. “With all the inflation indices way above the RBI’s comfort zone and given its focus on inflation over growth, it’s going to be a long wait for monetary easing.”

The cost to lock in borrowing costs for a year in India using interest-rate swaps climbed 26 basis points from a 14- month low in June to 7.74 percent, data compiled by Bloomberg show. Similar contracts rose 16 basis points to 2.68 percent in China and fell 33 basis points in Brazil to 7.38 percent.

Real Yields

Rupee-denominated sovereign notes returned 5.9 percent this year, trailing the 7.2 percent earned by Indonesian securities in Asia’s best performance, HSBC Holdings Plc indexes show. Rupiah debt is more attractive than rupee bonds as they offer higher inflation-adjusted yields, according to Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt.

Ten-year sovereign debt in India currently offers a yield of 92 basis points after adjusting for consumer-price gains, compared with 119 in Indonesia, data compiled by Bloomberg show.

“In India, inflation is still relatively high and not fully under control,” Dergachev said by e-mail Aug. 9. “Indonesia has higher real interest rates than India, inflation seems to be under control and the central bank may cut rates to stimulate growth.”

‘Cheapest Currency’

Indian bonds have become more attractive after the rupee tumbled 18 percent in the past year, Asia’s worst currency performance that made the nation’s assets cheaper, according to Aviva Investors Ltd. Relatively high yields add to the appeal of local-currency securities, according to the money manager.

The rupee was little changed at 55.2850 per dollar on Aug. 10. Benchmark 10-year sovereign bonds yielded 8.17 percent on the same day, 653 basis points more than similar-maturity U.S. Treasuries, according to data compiled by Bloomberg. DSP Blackrock Investment Managers Ltd., the local unit of the world’s biggest money manager, predicted last week the yield will rise to 8.4 percent in three months on the risk of faster inflation.

“The rupee has become the cheapest currency in Asia and bond yields are now very high compared to the whole world,” Kieran Curtis, who helps oversee $4 billion in emerging-market debt at Aviva Investors, said in an e-mail on Aug. 9.

Demand for Indian bonds may slow as inflation risks prompt a delay in monetary easing and the government boosts debt sales to meet a record borrowing target, according to Nomura, Japan’s largest brokerage.

The finance ministry plans to borrow 5.69 trillion rupees ($103 billion) this fiscal year, according to budget estimates. It raised a total 150 billion rupees on Aug. 10 selling securities maturing in 2017, 2022, 2030 and 2036, according to the central bank.

“We are looking at back-loaded interest-rate cuts now, given inflationary concerns,” said Vivek Rajpal, a fixed-income strategist in Mumbai at Nomura. “Investors are probably in no hurry to buy bonds given the current debt-supply environment.”

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at; Kartik Goyal in Mumbai at

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

The Aging of Abercrombie & Fitch
blog comments powered by Disqus