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HDFC Sees 20% Mortgage Jump, Half-Point Rate Cut: India Credit

India’s biggest mortgage lender predicts an increase in home loans of as much as 20 percent as a further half percentage point interest-rate cut will spur demand in smaller cities.

The expansion in Housing Development Finance Corp. (HDFC)’s loan book in the year through March 2013 may match the 20.3 percent pace of the previous 12 months, Keki Mistry, Mumbai-based chief executive officer of the company known as HDFC said in a July 20 telephone interview. State Bank of India’s home-loan growth will match last year’s 11 percent rate, Chief Financial Officer Diwakar Gupta, said in an interview yesterday.

The forecasts show central bank Governor Duvvuri Subbarao has leverage to stimulate housing demand in an economy growing at the slowest pace in almost a decade. Traders are betting borrowing costs will decline with five-year interest-rate swaps, the fixed cost to lock in floating rates, falling 26 basis points in the past month to 6.93 percent in India, more than the 16 basis point drop in China.

“There is strong demand for loans in Tier 2 cities,” which have been less affected by India’s economic slowdown than Mumbai, said Mistry. “Indian interest rates may drop by another 50 basis points by year-end.”

Credit Suisse Group AG and Yes Bank Ltd. also forecast the Reserve Bank of India, which in April cut the repurchase rate to 8 percent from 8.50 percent in its first reduction since 2009, will lower it to 7.50 percent by Dec. 31 to boost growth. The central bank left the rate unchanged in the mid-quarterly monetary policy review in June, and all 11 economists surveyed by Bloomberg expect no change at its next appraisal on July 31.

AAA Rating

Rated AAA by Standard & Poor’s Indian unit Crisil Ltd., HDFC is the third-biggest debt issuer so far in 2012 with sales of 95 billion rupees ($1.7 billion), according to data compiled by Bloomberg. It sold 119.4 billion rupees of bonds in the same period last year and was the top issuer then. Indian companies sold 1.14 trillion rupees of local bonds this year, 32 percent more than a year earlier, the data show.

The yield on HDFC’s 9.7 percent notes maturing in February 2016 has dropped 26 basis points, or 0.26 percentage points, to 9.21 percent, according to the Fixed Income Money Market & Derivatives Association of India.

The yield premium that investors demand for top-rated five- year Indian corporate debt compared with similar-maturity government notes widened to 154.8 basis points, from 124.9 at the start of the month, the data show. Borrowing costs are 4.15 percent for AAA-rated Chinese companies.

‘Expect Positivity’

“The spreads are probably near the peak and most economic indicators point towards a shrinkage,” Ganti N. Murthy, Mumbai- based head of fixed income investments at Peerless Funds Management Co., which oversees the equivalent of $687 million in assets, said in a July 20 telephone interview. “Too much pessimism had been priced in and some of that has to get reversed now. Issuers and investors, alike, can expect some positivity to return to the markets sooner than later.”

India’s inflation rate unexpectedly slowed last month, with wholesale prices rising 7.25 percent from a year earlier, after climbing 7.55 percent in May, government data show. The country has the fastest inflation of the so-called BRIC economies, which include China, Russia and Brazil.

Asia’s third-largest economy expanded 5.3 percent in the quarter ended March 31, the least in nine years.

HDFC reported this month net income in the quarter ended June 30 rose 19 percent to 10.2 billion rupees from a year earlier. Bad loans at the lender have declined 30 straight quarters, according to Mistry.

Asset Quality

“We are not seeing any stress in our home loan portfolio,” Mistry said. “I’m not expecting any negative surprises going ahead as far as asset quality is concerned.”

Elsewhere in India’s credit markets, rupee declined 0.1 percent to 56 per dollar as of 11:56 a.m. in Mumbai, according to data compiled by Bloomberg. The yield on the government’s 8.15 percent bonds due June 2012 fell 11 basis points, or 0.11 percentage point, this month. The notes yielded 8.07 percent in Mumbai today, according to the central bank’s trading system.

The extra yield on government debt over Treasuries widened four basis points to 664 today, according to data compiled by Bloomberg.

Indian sovereign notes returned 6.1 percent this year, trailing the 6.4 percent earned by Indonesian securities in the region’s best performance, according to HSBC Holdings Plc indexes.

Credit-default swaps on State Bank, which some investors consider a proxy for the sovereign, have this month declined 39 basis points to 330.7 in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

“Demand for home loans from all markets is strong,” State Bank CFO Gupta said. “Further cuts in the policy rate will strengthen demand for loans.”

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Sandy Hendry at shendry@bloomberg.net

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