Record Crop Cooling Food Inflation Attracts Nomura to Bonds: India Credit

India is forecasting record crops this year that may damp food prices, prompting Nomura Holdings Inc. and Barclays Plc to predict a rally in the nation’s bonds.

The nation will have unprecedented harvests of corn and soy, Atul Chaturvedi, chief executive officer of Adani Wilmar Ltd., a unit of India’s biggest farm-produce trader, said in an Oct. 20 interview. Shree Renuka Sugars Ltd., the largest refiner by capacity, said last week output will beat estimates. Nomura predicts the benchmark 10-year bond yield will drop 37 basis points to an eight-month low of 7.75 percent by March 31 and Barclays expects a similar slide by year-end.

Kokusai Asset Management Co. and Forefront Capital Management Pvt. say five interest-rate increases this year will cool inflation, even after China raised borrowing costs this week for the first time since 2007. The Reserve Bank of India, which needs to keep food costs from escalating in a nation where more than 70 percent of residents live on less than $2 a day, forecasts gains in the wholesale-price index will moderate to 6 percent by March from 11 percent in April.

“The price effect will be visible from November onwards as actual harvesting starts now,” Sonal Varma, a Mumbai-based economist at Nomura, said in an Oct. 19 interview. “We are bullish on bonds based on inflation.”

Food Inflation

Food inflation slowed to 15.5 percent in the week ended Oct. 9 from 16.3 percent a week earlier and this year’s high of 22.9 percent reached in June, a government report showed this week. Data last week showed wholesale-price inflation in September was 8.62 percent, holding near an eight-month low of 8.51 percent in August.

Reserve Bank Governor Duvvuri Subbarao, who has lifted the reverse repurchase rate 175 basis points, or 1.75 percentage points, in 2010, will leave the rate unchanged for the rest of the year, according to the median forecast of eight economists surveyed by Bloomberg. The central bank meets next on Nov. 2 to review the repurchase rate, currently at 5 percent.

“The environment surrounding India’s bond markets has been improving with the risk of aggressive rate hikes fading,” Takahide Irimura, head of emerging-market research in Tokyo at Kokusai Asset that manages about $60 billion in assets, said in an interview on Oct. 20.

Above-Average Rains

The government says the heaviest monsoon rains since 2007 will boost farm output, which accounts for about 20 percent of the economy in the nation of 1.2 billion people. India received 913 millimeters (35.9 inches) of rainfall between June 1 and Sept. 30, or 102 percent of the long-term average, according to a statement on India Meteorological Department’s website.

Monsoon-sown food-grain output may rise 10.4 percent and rice output may climb 5.9 percent, the farm ministry said on Sept. 23. Corn production may exceed 20 million metric tons in the year to June 2011, topping a record 19.73 million tons, Adani Wilmar’s Chaturvedi said. Soybean output may climb to an all-time high of more than 10 million tons, he said.

Sugar production may be 26 million metric tons in the year started Oct. 1, Narendra Murkumbi, managing director of Shree Renuka Sugars, said in an interview on Oct. 13. That is more than 25.5 million tons forecast by the Indian Sugar Mills Association.

‘Good for Inflation’

“A decent harvest plus above-average monsoon mean we’ve seen better yields,” Radhika Gupta, Mumbai-based director at Forefront Capital, said in an interview on Oct. 19. “So ultimately prices of staples should moderate, which is a good thing for inflation.”

At the same time, the increase in food prices in China has accelerated as floods have disrupted supplies. In September, food costs rose 8 percent from a year earlier, after climbing 3.7 percent in January, this year’s lowest pace. The nation’s consumer price inflation accelerated 3.6 percent last month, the fastest in 23 months, the statistics bureau said yesterday.

Since China raised borrowing costs on Oct. 19, the yield on India’s 7.8 percent note due May 2020 has climbed 5 basis points to 8.13 percent yesterday.

The yield on the 10-year bond fell one basis point to 8.12 percent as of 9:09 a.m. in Mumbai after the central bank said late yesterday it will buy back 120 billion rupees of bonds due this year and next through an auction on Oct. 25.

India’s 10-year bond yield is higher than China’s 3.63 percent and lower than Brazil’s 12.18 percent, according to data compiled by Bloomberg. The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries was 559 basis points and has averaged 317 in the past decade.

Foreign Investment

Overseas investors have pumped a record $23.3 billion into Indian stocks this year, according to exchange data, making a measure that weighs company earnings against their shares prices the costliest in Asia. Inflows into rupee bonds this year are at $10 billion, the Securities & Exchange Board of India said yesterday.

“There’s very little slack available and we’re starting to see non-food inflationary pressures as the primary driver in inflation,” Kenneth Akintewe, a Singapore-based investment manager at Aberdeen Asset Management Plc that oversees $261 billion globally, said in an interview on Oct. 20. “There is still a need for policy to address this. I’m expecting that you would see around 25 to 50 basis points before the RBI entertains moving to a hold.”

As borrowing costs rose, the nation’s local-currency debt returned 3.52 percent in 2010, the worst performance in Asia excluding China, where investors earned 2.50 percent, according to indexes compiled by HSBC Holdings Plc.

The rupee has gained 2.3 percent in the past month, the third-best performance among Asia’s most-active currencies excluding the yen, on optimism that policy makers are gaining control over inflation. The currency fell 0.4 percent today to 44.4850 per dollar.

“Given the moderation in inflation, we think the Reserve Bank is almost done with its rate-increase cycle,” Kumar Rachapudi, a fixed-income strategist at Barclays in Singapore, said in an interview on Oct. 20. “We expect the benchmark inflation to come down to 6 percent by December-end and that may send the yield on the 10-year bond lower by as much as 30 basis points to 7.7 percent.”

To contact the reporters on this story: Madelene Pearson in Mumbai at mpearson1@bloomberg.net Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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

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