Inflation to Restrain Indian Corporate Bond Appetite, HSBC Economist Says

Inflation driven by prices of food and manufactured goods threatens to drive Indian interest rates higher this year, pushing investors away from corporate bonds, according to HSBC Holdings Plc.

“The inflation outlook in India is slightly more worrying than in other countries,” Frederic Neumann, co-head of Asian economic research, said in a telephone interview from Hong Kong. “That might restrain investor appetite for fixed-income products like corporate credit.”

Consumer prices surged 13.9 percent in May, the highest among 17 Asian markets tracked by Bloomberg. The Reserve Bank of India has raised its benchmark interest rate three times this year to 4 percent. Economists surveyed by Bloomberg News expect the reverse repurchase rate to be raised again next week by a quarter point.

Prime Minister Manmohan Singh’s government on June 25 let state-run refiners increase prices of gasoline and diesel to cut state oil subsidies. Finance Minister Pranab Mukherjee this week said inflation was a matter for concern, and is no longer confined to increases in food prices.

Bond markets are more sensitive to inflation than stocks, said Neumann. Higher prices erode bonds’ fixed returns. Indian dollar bonds have returned 7.6 percent on average this year, JPMorgan Chase & Co. indexes show.

Economic growth will also fuel inflation, and HSBC expects the Indian corporate profit outlook to remain strong because of companies’ pricing power and productivity gains, Neumann said. HSBC may lift its 2010 wholesale-price inflation forecast, said Neumann. The central bank may raise interest rates by 1.5 percentage points within a year, he said.

The benchmark wholesale-price index jumped 10.55 percent in June, after climbing 11.23 percent in April -- the most in 19 months, a government report showed last week.

India’s 10-year government bond yields rose to the highest level in a month yesterday, on speculation of a further interest rate increase.

To contact the reporter on this story: Suprotip Ghosh in New Delhi at Sghosh47@bloomberg.net

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