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India Money-Market Rates Drop From Highest in 38 Months

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

India’s money-market rates are dropping from the highest in 38 months as Prime Minister Manmohan Singh accelerates spending to revive growth in Asia’s third-biggest economy.

Three-month commercial paper yields slumped 80 basis points in April to 10.45 percent after touching 11.9 percent in March, according to data compiled by Bloomberg. Similar rates in the U.S. fell six basis points and were unchanged in China. Lenders in India borrowed 786 billion rupees ($15.4 billion) on April 4 to meet funding shortages, the least in three months.

Cash availability will improve as the government kickstarts this year’s 15 trillion rupee spending plan that includes paying for pensions, road-building and phone services, according to Deutsche Bank AG. Global investors have boosted rupee debt holdings for 12 consecutive quarters after policy makers estimated the economy would grow 7.6 percent this fiscal year, from 6.9 percent last year.

“The expectation is that cash conditions should improve as the government boosts spending,” K. Ramanathan, the Mumbai-based chief investment officer at ING Investment Management Pvt., a unit of the largest Dutch financial services company that oversees $305 million, said in an interview yesterday. “That should help bring down money-market rates quite a bit.”

The three-month rate will slide to 9.25 percent in the next two months, he said.

Cash Balance

Banks are relying less on the central bank to meet their funding shortages. Lenders borrowed 1.1 trillion rupees on average per day from the central bank this month, according to Reserve Bank of India data. They sought a record 1.5 trillion rupees in March as companies prepared to pay taxes.

Fiscal spending, set to increase 13 percent this year, is often frontloaded because the government uses up the previous year’s tax income. The federal administration’s cash balance was 1.2 trillion rupees as of March 23, equivalent to 1.2 percent of gross domestic product, Deutsche Bank estimated in a note to clients on April 5. “This would also improve the liquidity position in April substantively,” according to the note.

Yields on three-month commercial paper fell five basis points, or 0.05 percentage point, yesterday to the lowest since Feb. 10. Still, the 10.45 percent rate is almost 10 percentage points more than in the U.S. and compares with China’s 4.2 percent.

Reserve Requirements

Indian government bonds rallied for a third day today, with the yield on the benchmark 8.79 percent notes due November 2021 dropping one basis point to 8.62 percent. The central bank may buy federal securities worth as much as 2 trillion rupees in the current fiscal year after purchasing 1.3 trillion rupees in the prior 12 months, according to IndusInd Bank Ltd.

Three-month money-market rates could drop to 8.5 percent by the end of June as the Reserve Bank injects cash into the financial system by cutting lenders’ reserve requirements, J. Moses Harding, the Mumbai-based executive vice president at IndusInd Bank, said in an interview yesterday. The central bank will reduce the amount of cash needed to be set aside by 125 basis points in the current fiscal year, he predicted.

The government’s record borrowing plan will keep money-market rates elevated, according to Kotak Mahindra Bank Ltd. The finance ministry intends to borrow 5.69 trillion rupees this fiscal year, 12 percent more than in the 12 months through March. Money supply, which comprises currency in circulation, bank deposits and investment in other savings plans, rose 13 percent in the year through March 23, according to central bank data. That was the slowest pace of growth since April 2005.

Bond Risk

“Government borrowing is strong, which is curbing the availability of cash,” Indranil Pan, the Mumbai-based chief economist at Kotak Mahindra Bank, said in an interview yesterday. “Short-term rates will continue to be under pressure for at least a couple of months.”

India’s bond risk has climbed since Finance Minister Pranab Mukherjee unveiled his borrowing plan in parliament on March 16. Credit-default swaps that protect the debt of State Bank of India have increased 30 basis points to 335 points, 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, the nation’s biggest, a proxy for the sovereign. The swaps pay face value should a company fail to adhere to its agreements.

The yield premium that investors seek to hold rupee-denominated debt has dropped as global funds boost holdings of Indian bonds. The difference in yields between the government’s 10-year notes and similar-maturity U.S. Treasuries has shrunk to 669 basis points from a record 697 basis points reached in November.

Call Rate

International investors raised their ownership of local bonds by $3.9 billion in the three months through March to $30 billion, according to the Securities & Exchange Board of India.

India’s bonds returned 5 percent in the past year, compared with the 23.2 percent earned by Indonesian securities, according to a debt-market index monitored by HSBC Holdings Plc.

The call-money rate, at which lenders borrow from another, has slumped 605 basis points, since reaching a three-year high of 15 percent on March 30.

“Cash conditions should remain fairly comfortable in the near term as the government starts spending in the fiscal year,” Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura Holdings Inc., said in an interview on April 4.

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