Funds Unload Most Bonds in Two Years on India Debt
International investors are cutting holdings of Indian bonds by the most in more than two years as the government plans to complete the bulk of its record borrowing plan in the coming six months.
Global funds sold $902 million more rupee-denominated notes than they bought this month, the first net selling since September and the biggest reduction since October 2010, according to the Securities & Exchange Board of India. The finance ministry will raise 65 percent of its debt-sale target in the fiscal first half, compared with 49 percent a year earlier, Economic Affairs Secretary R. Gopalan said this week.
Benchmark bonds are headed for their first decline in five months as surging oil prices push up Prime Minister Manmohan Singh’s subsidy bill. The 8.59 percent yield on 10-year notes is almost four times what investors seek from similar-maturity U.S. Treasuries and 2.4 times for Chinese securities.
“The mood is quite bearish among bond investors,” M. Natarajan, the Mumbai-based head of treasury at Bank of Nova Scotia, said in an interview on March 27. “People are mentally prepared for a further rise in yields as supplies are going to be huge and persistent.”
Canada’s third-biggest lender predicts the benchmark yield will reach 8.65 percent next month.
Policy makers plan to raise 3.7 trillion rupees ($72 billion) from debt sales in the six months through September, Gopalan told reporters in New Delhi on March 27. The finance ministry intends to borrow 5.69 trillion rupees in the year starting April, 12 percent more than in the current fiscal year, according to budget documents presented in parliament on March 16.
Global funds reduced ownership of local bonds to $30.6 billion as of March 27, contributing to a 38-basis point, or 0.38 percentage point, increase in 10-year yields this month. The yield on benchmark 8.79 percent notes due April 2021 fell three basis points today to 8.59 percent, according to the central bank’s trading system.
Bonds could slump more as Singh may be unable to contain the subsidy bill, according to Skandinaviska Enskilda Banken AB, Sweden’s third-biggest lender by assets. The government vowed to cap handouts at 1.9 trillion rupees in the next fiscal year, 12 percent lower than this year, to reduce the budget deficit to 5.1 percent of gross domestic product from 5.9 percent.
The “implementation risk on subsidies is high” before Singh’s Congress party competes in 2014 federal elections, Fitch Ratings said this month. Brent crude, the benchmark for almost all of India’s oil imports, has climbed 16 percent this year to $124.07 a barrel. Oil accounts for 23 percent of subsidy costs.
“The subsidy amount announced in the budget is ambitious,” Sailesh K. Jha, the Singapore-based head of Asia markets at Skandinaviska Enskilda Banken, said in an interview yesterday. “Given the political dynamics and what the economy needs in terms of growth, the borrowing and fiscal deficit could be higher than the target.”
Jha said the government may end up borrowing 6.1 trillion rupees and revise the deficit goal to as much as 6 percent of GDP. He predicts the 10-year yield could reach 8.8 percent by “summer 2012,” which runs from April through June in India.
The surge in yields offers global investors a “good buying opportunity” as the currency’s exchange rate stabilizes, according to Mumbai-based IndusInd Bank Ltd. The rupee traded at 51.14 per dollar today, 0.7 percent weaker. It has advanced 3.8 percent this year, the best performance among Asia’s 11 most- traded currencies.
India’s 10-year notes offer investors 640 basis points more than similar-maturity U.S. Treasuries. Similar spreads are 132 basis points in China and 179 basis points in South Korea. Rupee-denominated notes returned 1.3 percent this year, the best performance after Indonesia among Asian local-currency debt markets monitored by HSBC Holdings Plc.
“Foreign inflows into debt will continue as the yield is too attractive to ignore,” J. Moses Harding, a Mumbai-based executive vice-president at IndusInd Bank, said in an interview yesterday. “If buyers hedge currency exposure, the dollar returns are irresistible.”
The yield on 10-year bonds will peak at about 8.65 percent “in the coming months,” he said.
India’s bond risk is rising along with federal borrowings. Credit-default swaps that protect the debt of State Bank of India rose 30 basis points in March after sliding 95 basis points through January and February, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Some investors consider the lender a proxy for the sovereign. The swaps pay face value should a company fail to adhere to its agreements.
Surging oil prices mean that the Reserve Bank of India will cut its benchmark repurchase rate less than earlier estimated, according to BNP Paribas SA. The central bank will reduce the lending rate by less than 100 basis points in the next fiscal year, Richard Iley, the Hong Kong-based chief economist for Asia at the French bank, said in an interview this month.
“The government’s borrowing program, coupled with receding expectations of the magnitude of rate cuts by the central bank, would exert upward pressure on sovereign yields,” Gaurav Kapur, a Mumbai-based senior economist at Royal Bank of Scotland Group Plc, said in an interview yesterday. “The 10-year yield can touch 8.70 percent next month if oil prices rise further.”
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