Mukherjee Crowds Out Issuers With Indian Government Glut

India's Finance Minister Pranab Mukherjee
Pranab Mukherjee, India's finance minister, center. Photographer: Pankaj Nangia/Bloomberg

Indian companies are reviewing plans to sell rupee-denominated bonds after Finance Minister Pranab Mukherjee’s proposal to issue record government debt drove borrowing costs to the highest in four months.

Yields on five-year company notes with top ratings jumped to 9.64 percent on April 3, from 9.45 percent a week earlier, when the government announced plans to increase issuance by 50 percent, according to data compiled by Bloomberg. Average yields on global investment-grade companies fell to 3.42 percent on April 4, from 3.95 percent at the end of last year, according to Bank of America Merrill Lynch indexes.

Mukherjee is seeking to raise 3.7 trillion rupees ($72.1 billion) from debt offerings through September as Asia’s third-largest economy funds a budget deficit estimated at 5.1 percent of gross domestic product. National Housing Bank, a state-owned lender to mortgage companies, and cement maker Jaiprakash Associates Ltd. will review financing plans as government sales drive up borrowing costs and make it harder for the central bank to cut interest rates.

“The government is borrowing too much and the banking system is not able to provide as much funding to both them and the private sector,” Pratip Chaudhuri, chairman of State Bank of India, the nation’s largest lender, said in an interview from Mumbai on April 4, before markets closed for a two-day bank holiday. “The ability of customers to borrow is declining, which is softening demand for credit.”

‘Imminent Reduction’

Jaiprakash Associates, which has about 18 percent of its $2.32 billion of bonds outstanding coming due this year, may cut sales after the announcement, Rahul Kumar, chief financial officer, said in an interview from New Delhi April 3.

“A reduction is rather imminent considering the sudden jump in yields,” Kumar said. “What was planned a few weeks ago doesn’t look feasible.”

The government plans to seek 63 percent of its annual borrowing in the April to September period, Economic Affairs Secretary R. Gopalan said on March 27.

The Reserve Bank of India raised borrowing costs 13 times in the past two years to curb inflation, the fastest pace of increases by any monetary authority in Asia, making it more expensive to sell rupee-denominated debt. Policy makers will next meet on April 17 to decide on interest rates.

Companies sold 536 billion rupees of notes so far this year, compared with 493 billion rupees in the fourth quarter.

National Housing Bank

“The government’s borrowing plan and other market developments give us reason to believe that fundraising will be different from what we had envisaged,” R.V. Verma, chairman and managing director of National Housing Bank, said in a telephone interview from New Delhi on April 2.

Demand faltered at India’s first debt sale of the financial year that began April 1. Primary dealers, who underwrite sales, bought 6.6 percent of the 180 billion rupees of the notes offered April 3.

Sovereign bonds rose, helping yields on the most-traded securities due in November 2021 drop from a four-month high. Yields declined 4 basis points to 8.65 percent as of 9:05 a.m. in Mumbai, compared with April 4, according to the central bank’s trading system.

Funds based abroad bought $3.74 billion of Indian local-currency bonds this year to benefit from rising yields. That helped the rupee rebound 3.8 percent this year, following last year’s 16 percent slide, Asia’s worst currency performance, according to data compiled by Bloomberg. The rupee weakened 0.5 percent to 51.34 against the dollar today in Mumbai.

Overseas Borrowing

The cost of protecting the notes of State Bank of India against default rose 7.9 basis points this month to 332.2 as of April 6, 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.

Some Indian issuers are turning to overseas sales as the nation cuts taxes on interest income to international borrowers and amid concern the Reserve Bank won’t lower interest rates from 8.5 percent as early as anticipated.

Power Finance Corp., the second-biggest issuer of rupee notes this year, is planning investor meetings this month for a possible benchmark dollar bond sale, a person familiar with the matter said April 4. That typically means at least $500 million.

Cash Situation

“Lending rates are not going to come down soon, because not only do they need a reduction in the benchmark rate but the cash situation in the banking system needs to improve,” Shailendra Bhandari, managing director and chief executive of ING Vysya Bank Ltd., the Indian unit of the biggest Dutch financial services company, said in a March 29 interview.

Lenders have borrowed from the central bank on each business day since Oct. 5 through repurchase auctions.

Slowing inflation may still allow policy makers to lower interest rates for the first time since 2009, said Mangalore Devadas Mallya, chairman and managing director of state-owned Bank of Baroda. “We have conveyed to the central bank that interest rates are high and we need to work out monetary easing measures without impacting inflation,” Mallya said after a meeting with Governor Duvvuri Subbarao in Mumbai on April 4.

Gains in the wholesale-price index averaged 6.75 percent in the first two months of this year, compared with 9.5 percent in the whole of 2011, official data show.

India’s Finance Minister Mukherjee on March 16 projected record borrowing at 5.69 trillion rupees to finance the deficit. The Reserve Bank has said the shortfall may increase the risk of inflation.

Managing the borrowing plan will be a challenge, Harun Rashid Khan, a central bank deputy governor, said at a press conference in Mumbai on March 16 after Mukherjee announced the budget proposals for the year starting April 1.

“The government’s debt sale plan is going to push the premium for money higher,” Rajiv Kumar Bakshi, an executive director at Bank of Baroda said in a telephone interview on April 2. “Company borrowing will become more vulnerable to interest costs in coming months as the macroeconomic situation leaves little room for comfort.”

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