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Singh Crowding Out Companies Pushes Rates Higher: India Credit

Manmohan Singh, India's prime minister. Photographer: Pankaj Nangia/Bloomberg
Manmohan Singh, India's prime minister. Photographer: Pankaj Nangia/Bloomberg

Feb. 27 (Bloomberg) -- Indian companies are paying the highest borrowing costs in 11 months as the government’s record debt sales drain cash from the banking system.

Three-month commercial paper yields surged 90 basis points this year to 10.73 percent, while similar rates in China slid 77 basis points and were unchanged in the U.S., according to data compiled by Bloomberg. Lenders in Asia’s third-biggest economy borrowed 1.3 trillion rupees ($26.5 billion) on average every day from the Reserve Bank of India this quarter to meet fund shortages, more than twice the maximum of 600 billion rupees favored by the central bank.

A two-month rally in the nation’s benchmark bonds has slowed after Prime Minister Manmohan Singh’s administration boosted its borrowing program for the fiscal year to a level that is 23 percent higher than planned. Money-market rates will trend higher until policy makers cut borrowing costs, according to Peerless Mutual Fund and Federal Bank Ltd.

“The surge in commercial-paper rates is a result of the government crowding out the debt market following the increase in its borrowing program,” Krishnamurthy Harihar, a Mumbai-based treasurer at FirstRand Ltd., a unit of South Africa’s second-largest banking group, said in an interview on Feb. 24. “The rate is likely to be sticky until the RBI injects liquidity by reducing banks’ reserve requirements.”

Borrowing Program

Mumbai-based Housing Development Finance Corp., the nation’s largest mortgage lender, sold three-month commercial paper on Feb. 22 at 10.55 percent, 135 basis points higher than in July when it raised similar-maturity debt. Apollo Tyres Ltd., based in Gurgaon near New Delhi, borrowed for 90 days at 10.95 percent on Feb. 17, about 68 basis points, or 0.68 percentage point, higher than what it paid a month earlier, according to data compiled by Bloomberg.

The cash crunch worsened after the finance ministry revised its borrowing plan for the 12 months through March on Dec. 30. The government said that day it was pushing up its borrowing target to 5.1 trillion rupees, compared with the 4.17 trillion rupees it had outlined before the start of the fiscal year. The federal administration’s revenue in the nine months ended December fell 14 percent from a year earlier to 4.8 trillion rupees, official data showed last month.

Cash Shortages

Banks sought 1.3 trillion rupees on average per day from the Reserve Bank in 2012, about 8 percent higher than in December, according to data from the monetary authority. The call money rate, at which banks borrow from one another, was 8.95 percent today. The rate has more than doubled from last year’s low of 3.5 percent touched on June 30.

India’s lenders, traditionally the biggest buyers of government bonds, are selling sovereign securities to boost their cash. Banks sold 29.70 billion rupees more notes than they bought in January, reducing their holdings for a second straight month, according to Reserve Bank data.

The yield on the nation’s 10-year bonds has climbed from a nine-month low of 8.13 percent touched on Feb. 2. The yield on the benchmark 8.79 percent securities due November 2021 was little changed at 8.23 percent today, the highest level since Feb. 9. The spread between those notes and similar-maturity U.S. Treasuries has widened to 624 basis points from last year’s low of 438 basis points.

India’s benchmark Sensitive Index of shares fell 2 percent last week, the most since the five-day period ended Dec. 16, as higher borrowing costs contributed to weaker-than-forecast earnings. Fourteen out of 30, or 47 percent, of companies in the benchmark Sensitive Index of shares reported net income for the three months through December that trailed analyst estimates, compared with 40 percent in the quarter earlier.

Reserve Requirements

“The higher funding costs are bound to have an impact on companies’ earnings,” Ganti N. Murthy, the Mumbai-based head of fixed income at Peerless Mutual Fund that oversees the equivalent of $892 million, said in an interview on Feb. 23. “Tight cash conditions are also diminishing their growth prospects and in turn the growth of the economy.”

The central bank is buying government bonds from the market to temper the increase in yields. The Reserve Bank bought 118.4 billion rupees of notes on Feb. 24, taking its purchases since the start of November to 1.02 trillion rupees. It also cut the amount of deposits lenders need to set aside as reserves by 50 basis points to 5.5 percent, the first reduction since 2009, to free up funds in the financial system.

Rupee’s Advance

“Short-term rates should come down as the Reserve Bank will continue to inject liquidity through a combination of open-market operations and reductions in the cash-reserve ratio,” Mahendra Jajoo, the head of fixed income in Mumbai at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc. that oversees $425 million, said in an interview on Feb. 23. “From here on, money-market rates should stabilize and ease gradually.”

Jajoo predicts the central bank will reduce the cash-reserve ratio by 50 basis points at its next policy review on March 15.

Speculation that the Reserve Bank will loosen monetary policy is slowing the rupee’s gains. The currency fell 0.1 percent to 49.01 per dollar today, paring its advance for February to 0.6 percent. The rupee strengthened 7.3 percent last month, the most since at least 1973.

Companies’ higher funding costs are pushing up the bond risk of the nation’s borrowers. The average cost of credit-default swaps on eight local issuers of debt has climbed 116 basis points from a year ago to 339 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.

Growth Forecast

The increase in sovereign yields is crimping the return on India’s bonds. Dollar-based investors earned 5.4 percent on the nation’s securities in the past year, trailing the advance in eight of 11 debt markets tracked by HSBC Holdings Plc.

The Reserve Bank will cut reserve requirements by 50 basis points next month to ensure that companies have enough funds needed to support growth in the economy, according to Federal Bank. Gross domestic product rose 6.3 percent in the three months through December, the least since the quarter ended March 2009, according to the median estimate of economists in a Bloomberg survey before government data due on Feb. 29.

“Persistently tight cash conditions have pushed up money-market rates and are aggravating a slowdown in the economy,” Roy Paul, a Mumbai-based deputy general manager of treasury at Federal Bank, said in an interview on Feb. 24.

To contact the reporters on this story: V. Ramakrishnan in Mumbai at

To contact the editor responsible for this story: Sandy Hendry at

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