Bloomberg News

RBI Control Seen as 10-Year Yield Matches One-Year: India Credit

January 17, 2013

Bond investors in India are growing more confident the central bank has inflation under control, lowering the 10-year yield to a level that matched one-year rates for the first time in 13 months.

The government’s 10-year borrowing cost, more sensitive to price changes than shorter-dated rates, dropped 22 basis points this month to 7.83 percent on Jan. 15, equaling one-year yields for the first time since December 2011. In China, notes maturing in a decade offer 3.62 percent, 79 basis points more than those due in a year. India’s benchmark price index rose 7.18 percent in December, the least in three years, a Jan. 14 report showed.

Standard Chartered Plc predicts price gains will decelerate until the third quarter, giving the Reserve Bank of India room to reduce the 8 percent repurchase rate by 100 basis points in 2013 to spur Asia’s third-largest economy. Governor Duvvuri Subbarao said Jan. 15 that price pressures still remain high, suggesting more efforts aimed at lowering living costs.

“The bond market is reflecting the prospect of a continued cooling of inflation,” R.S. Chauhan, Mumbai-based chief dealer of fixed-income and currencies at State Bank of Bikaner & Jaipur, a unit of the nation’s biggest lender, said in an interview on Jan. 15. “We expect the RBI to start cutting interest rates as early as this month.”

The premium investors demand to hold 10-year bonds instead of one-year securities has shrunk from a 2012 high of 62 basis points, or 0.62 percentage point, in May. The spread averaged 81 basis points in the last three years.

Interest Rates

The pace of price increases has eased from last year’s peak of 8.07 percent in September as the central bank held the region’s highest borrowing costs and the government reduced fuel prices. Consumer prices rose 5.84 percent last month in Brazil, 2.5 percent in China and 6.6 percent in Russia, according to the most recent official figures.

Gains in the wholesale-price index will probably slow toward 7 percent by March, Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s Economic Advisory Council, said in an interview on CNBC-TV18 television channel on Jan. 14.

At the last policy review on Dec. 18, Subbarao said policy makers’ focus needs to shift toward supporting growth from curbing price gains. The RBI next meets Jan. 29. The economy may expand as little as 5.7 percent in the year through March, the least in a decade, according to the finance ministry’s estimates.

Real Yield

“Easing headline inflation supports the likelihood of the central bank cutting rates in the January review,” said Aditi Nayar, a senior economist in Gurgaon, near New Delhi, at ICRA Ltd., the Indian unit of Moody’s Investors Service.

Slower price gains are boosting inflation-adjusted returns on Indian bonds. The so-called real yield on the 10-year note has climbed 64 basis points from last year’s low in October to 70 basis points, data compiled by Bloomberg show. Similar gauges are at 109 basis points in China and 162 in South Korea.

Rupee-denominated debt returned 11.04 percent in the past year, the best performance after Indonesia among Asia’s biggest local-currency fixed-income markets, HSBC Holdings Plc data show. The yield on India’s 10-year sovereign notes dropped 72 basis points since the end of 2011, data compiled by Bloomberg show. The securities still offer an extra 601 basis points over similar-maturity U.S. Treasuries.

Foreign Investment

International investors have poured $6.5 billion into local-currency debt since the end of 2011, boosting holdings to a record $33.3 billion on Jan. 3, according to data from the Securities & Exchange Board of India.

The yield on the benchmark 8.15 percent security due June 2022 fell three basis points to 7.85 percent today, while the rupee rallied 0.8 percent to 54.27 per dollar, after Subbarao said price pressures are still high. The RBI considers an inflation rate between 4 percent and 5 percent as a comfortable level, Deputy Governor K.C. Chakrabarty said on Nov. 15.

Bonds dropped yesterday “due to profit-taking by investors, after a sharp rally this week, as rate-cut expectations were tempered by the governor,” said Vivek Rajpal, a fixed-income strategist in Mumbai at Nomura Holdings Inc. “Inflation is still high compared to the central bank’s comfort zone.”

Bond risk in India fell this year. The cost to insure State Bank of India’s debt, considered a proxy for the sovereign by some investors, for five years against non-payment using credit- default swaps fell 21 basis points to 205, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

‘Fiscal Discipline’

The so-called yield curve also flattened as public finances improve. India deferred to February a debt sale previously scheduled for the week ended Jan. 4 after an official, who asked not to be identified, said that the finance ministry had 1.3 trillion rupees ($24 billion) of cash at the start of this month.

India raised at least $1.1 billion last month selling shares in iron ore producer NMDC Ltd., aiding a plan to narrow the budget shortfall to 5.3 percent of gross domestic product by March. The finance ministry plans to borrow a record 5.7 trillion rupees in the year through March, according to budget estimates.

“The yield compression is happening due to a drop in debt supply as well as the positive inflation outlook,” Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai, said in an interview yesterday. “The government seems to be serious about fiscal discipline and may set an even lower budget-deficit target for the next fiscal year.”

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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