Default Swaps Tumbling as Subbarao Tackles Housing Bubble: India Credit
Central bank Governor Duvvuri Subbarao
Adeel Halim/Bloomberg
Central bank Governor Duvvuri Subbarao said in a Nov. 3 interview that six interest-rate increases this year have slowed inflation and that he favors policy “supportive of growth,” while ensuring housing prices aren’t pushed up by speculators.
Central bank Governor Duvvuri Subbarao said in a Nov. 3 interview that six interest-rate increases this year have slowed inflation and that he favors policy “supportive of growth,” while ensuring housing prices aren’t pushed up by speculators. Photographer: Adeel Halim/Bloomberg
India’s decision to tighten limits on home loans is boosting confidence that regulators are addressing asset bubbles, cutting the cost to protect bank debt from default and supporting a rally in government bonds.
Credit-default swaps tied to the debt of ICICI Bank Ltd., the nation’s second-biggest lender, fell 10 basis points last week to 189, the lowest since Oct. 15, CMA data show. The yield on 10-year government bonds slid 13 basis points to 7.99 percent, the biggest decline since May, after the Reserve Bank of India required lenders to set aside more capital against housing loans.
“The central bank will take pre-emptive action on sectors that have potential to fuel speculation and eventually inflation,” said Rajeev Radhakrishnan, who manages the equivalent of $9.2 billion of debt and equities in Mumbai at SBI Funds Management Pvt., a unit of the nation’s biggest bank. “Such actions will impart more safety to conventional assets like fixed-income securities.”
Central bank Governor Duvvuri Subbarao said in a Nov. 3 interview that six interest-rate increases this year have slowed inflation and that he favors policy “supportive of growth,” while ensuring housing prices aren’t pushed up by speculators. The RBI seeks targeted controls on investment in overheated areas, such as property and stocks, instead of slowing the whole economy by raising borrowing costs, according to SMC Global Securities Ltd. and Mirae Asset India Investment Co.
Bonds Rally
The cost of fixing rupee borrowing costs for 12 months in the interest-rate swap market fell 6.5 basis points last week to 6.635 percent as investors pared expectations for rate increases. The yield on the benchmark 7.8 percent government note touched a one-month low of 7.92 percent. The market was closed on Nov. 5 for the Diwali public holiday.
Indian government bonds returned 4.3 percent this year, the third-worst performance among 10 local-currency debt markets outside Japan, according to indexes compiled by London-based HSBC Holdings Plc. The debt underperformed a 24 percent gain in Indonesian debt as rate increases caused bond prices to slump in the past six months.
The Reserve Bank lifted the repurchase rate by 0.25 percentage point to 6.25 percent on Nov. 2 to further curb wholesale price inflation, which cooled to 8.62 percent in September from 11 percent in April.
Investment Surge
The RBI’s stance on inflation helped the rupee gain 0.3 percent to 44.2 per dollar on Nov. 4, bringing its appreciation this year to 5.2 percent. Overseas investors bought a total of $35.5 billion of Indian equities and bonds this year, compared with $18.4 billion in the whole of 2009, according to data on the website of the Securities and Exchange Board of India.
“Though Indian asset prices aren’t close to being a bubble, sector-specific actions will prevent a build-up,” said Killol Pandya, who manages the equivalent of $135 million in debt at Shinsei Asset Management Pvt. in Mumbai. “That will bring investors to the debt securities market in the short to medium term.”
The cost to protect against a default by State Bank of India, a state-owned lender that is the nearest measure for sovereign debt, declined five points to 159 on Nov. 4, the lowest since April 27, according to New York-based CMA.
‘Defuse Pressure’
The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
The RBI strategy aims “to defuse pressure emerging in certain sectors and not the larger economic and market growth,” said Gopal Agrawal, head of equities at in Mumbai at Mirae Asset, an arm of South Korea’s biggest seller of mutual funds that has $2.5 billion invested in India.
The regulator asked commercial banks on Nov. 2 to increase provisions for home loans of 7.5 million rupees ($170,000) and above, as well as for “teaser” home loans, when banks offer low borrowing costs in the initial year or two. Bank lending for home purchases was 3.17 trillion rupees between April 1 and Sept. 24, up 3 percent from the year-earlier period.
The RBI measures “are a step in the right direction to mitigate emerging risks in banks’ housing loan portfolios,” Crisil Ltd., the Indian unit of Standard & Poor’s, said in a Nov. 3 statement. “The measures would ensure that credit quality in this segment remains robust.”
Stocks, Gold
The Reserve Bank, in its Nov. 2 statement, flagged concerns that prices of stocks, property and gold have risen too fast. While household income and corporate earnings have climbed, “a sharp rise in asset prices in such a short time causes concern,” the central bank said.
The benchmark Bombay Stock Exchange’s Sensitive Index reached a record last week, advancing 20 percent this year. Coal India Ltd., the world’s biggest producer of the fuel, surged 40 percent on its debut on Nov. 4, raising concern a stock bubble may be forming. Gold futures for December delivery surged 3.3 percent, the most since March 2009, on Nov. 4 on Comex in New York. The value of residential property in Gurgaon, outside New Delhi, has climbed 51 percent since June 2009.
Bombay Bullion Association President Prithviraj Kothari, speaking in an Nov. 4 interview, ruled out any intervention by regulators to cool demand for gold.
The government in Oct. 2007 clamped down on foreign funds investing in Indian stocks as the Sensex climbed towards its previous record. Offshore funds were asked to register in India and investors buying shares anonymously, using derivatives known as participatory notes, were given 18 months to switch to investing directly.
“The central bank can check bank lending for stocks as markets are at a high,” said Jagannadham Thunuguntla, chief strategist at SMC Global in New Delhi. “They can increase risk weights as they have done on home loans or simply ask banks to limit lending to the stock markets.”
To contact the reporters on this story: Anoop Agrawal in Mumbai at Aagrawal8@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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