India is considering selling sovereign bonds abroad for the first time as policy makers weigh measures to help stem rupee declines, two officials with direct knowledge of the matter said.
The option is being assessed as State Bank of India, the nation’s largest lender that helped raise dollar deposits from Indians residing abroad at the turn of the millennium, is reluctant to repeat such fundraising because of potential losses from regulatory restrictions, the people said, asking not to be identified as the deliberations are confidential. A decision will be reached and implemented quickly, one person said.
“Any such moves to boost foreign-currency reserves will be a stabilizing factor,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “Indian authorities can make the debt a compelling buy by convincing foreign investors that the rupee is undervalued, and that apart from the carry the bonds also offer from currency gains.”
India’s government is assessing ways of financing a record current-account deficit when demand for emerging-market debt is waning on concern the U.S. may reduce monetary stimulus. The average yield offered by dollar-denominated sovereign bonds of developing nations has surged 1.17 percentage points since May 22, JP Morgan Chase & Co. data show. Indonesia this week raised $1 billion, pricing the 10-year securities to yield the most since January 2010.
The rupee was the world’s worst performer against the dollar last month, fueling concern India needs higher reserves to stabilize it. The local currency touched an unprecedented low of 61.2125 a dollar on July 8.
SBI is against taking deposits from expatriate Indians again because banking rules require locking up 27 percent of the funds as cash reserves or in government-approved securities, the two people said. All options, including a sovereign issuance, are on the table, Raghuram Rajan, the finance ministry’s top economic adviser, told reporters in New Delhi today.
As many as eight bankers are meeting Finance Ministry officials in New Delhi today to assess the feasibility of debt sales overseas. Rajan was to chair the gathering, with Barclays Plc, Deutsche Bank AG and Bank of America Corp. among those present, two Finance Ministry officials said separately yesterday.
Mumbai-based spokesmen for Bank of America and Barclays declined to comment on the meeting yesterday. Madhvendra Das, Mumbai-based spokesman for Deutsche Bank, also declined to comment yesterday.
Indonesia’s notes due October 2023 were issued to yield 5.45 percent, or 2.87 percentage points more than 10-year U.S. Treasuries. Standard & Poor’s rates Indonesia’s foreign-currency debt a notch below investment grade, while similar debt issued by India is ranked the lowest investment grade with a negative outlook.
The extra yield offered by rupee-denominated 10-year sovereign debt over U.S. Treasuries has shrunk by 128 basis points from this year’s high of 622 on April 5, according to data compiled by Bloomberg.
India’s Finance Minister Palaniappan Chidambaram has spearheaded policy changes to woo capital inflows, including easing restrictions on foreign investment in local bonds and industries such as aviation.
He traveled to the U.S. this week to court investment and said in a July 11 speech in Washington that the nations have an opportunity to boost trade.
Reserve Bank of India Governor Duvvuri Subbarao said yesterday it’s difficult to estimate when the rupee will reverse declines and that inflation remains elevated.
“The rupee depreciation over the last six weeks has been because of global factors,” Subbarao told reporters in Indore in central India. “It’s difficult to say how long that effect will persist because it’s factors beyond our control.” He told villagers inflation remains “high” even after easing to some extent and controlling it is the priority.
The rupee, which has slumped about 9 percent in the past three months, weakened 0.4 percent to 59.9225 per dollar as of 12:25 p.m. in Mumbai. The yield on the 7.16 percent note due May 2023 rose was little changed at 7.47 percent, while the S&P BSE Sensex index rose 0.9 percent.
The currency’s plunge threatens to stoke import costs and curb the RBI’s scope to extend interest-rate cuts. Subbarao said he’ll assess growth, inflation and the external situation before his July 30 policy decision. He left borrowing costs unchanged in June.
“As long as there’s volatility in the markets the Reserve Bank will hold back from cutting interest rates,” said Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai.
India’s current-account deficit has been “high” and global developments in recent weeks have sparked exchange-rate movements in many nations, including India, Subbarao said.
Subbarao cut the benchmark repurchase rate by 25 basis points in January, March and May each to 7.25 percent. He was speaking to villagers yesterday as part of the central bank’s outreach program.
Consumer-price inflation was 9.31 percent in May, the second-fastest in the Group of 20 major economies. Wholesale prices climbed 4.7 percent, the slowest pace in 43 months.
Indian gross domestic product rose 5 percent in the year ended March, the least since 2003. Moderating investment, an extended fight against price pressures and a drop in exports hurt the expansion in Asia’s No. 3 economy.