Subbarao Dashes Hopes for Issuers as Debt Matures: India Credit

Reserve bank of India Governor Duvvuri Subbarao
Duvvuri Subbarao, governor of the Reserve Bank of India. Photographer: Joshua Roberts/Bloomberg

India’s companies, which held off bond sales expecting central bank Governor Duvvuri Subbarao to cut interest rates, now must accelerate offerings as debt maturities reach a six-year high.

Power Finance Corp., Housing Development Finance Corp. and National Bank for Agriculture & Rural Development, the three largest issuers, said they plan to sell notes in coming months. While companies’ rupee borrowing costs fell 20 basis points to 9.45 percent this quarter, they are still the highest of Asia’s biggest markets, according to data compiled by Bloomberg. U.S. corporate bond yields average 3.39 percent, Bank of America Merrill Lynch indexes show.

The sales may help revive rupee-denominated issuance, which slumped 29 percent this quarter to 399 billion rupees ($7.1 billion), the lowest in a year, as companies waited for the Reserve Bank of India to reduce interest rates and the government announced record borrowing. India’s top three issuers have 153 billion rupees of debt maturing by December, the most in a six-month period since the first half of 2006, according to data compiled by Bloomberg.

“Issuers do stand to gain on costs as and when the RBI reduces rates, but we don’t see a series of reductions in the near future,” R. Nagarajan, finance director at Power Finance, said in a telephone interview from New Delhi yesterday.

The one-year interest-rate swap rose about 30 basis points since June 15 to 7.87 percent yesterday, suggesting one cut, instead of two, in the 8 percent benchmark rate in the coming year. The rate was 7.83 percent as of 10:15 a.m. in Mumbai.

‘Disturbing’ Inflation

The Reserve Bank said on June 18 after unexpectedly keeping the key rate unchanged that “future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks.” The bank “stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.”

Policy makers need to restrain inflation, which is at “disturbing’ levels, and may have to sacrifice growth in the short term,” Subbarao said at a June 19 speech in Mumbai.

“We are going to go ahead with our debt sales because we need funds for our business,” V. Srinivasa Rangan, executive director of Housing Development Finance, said in a telephone interview from Mumbai on June 19. “It is likely that there will be only a moderate loosening in the benchmark rate.”

Yields on five-year notes sold by top-rated Indian companies were unchanged at 9.45 percent yesterday, according to data compiled by Bloomberg.

Investment Slows

“Borrowing costs have been an element responsible for investments slowing, capital expenditures stalling and economic activity decelerating,” Chandrajit Banerjee, director general of the Confederation of Indian Industry, a lobby group, said in a telephone interview from New Delhi yesterday.

Elsewhere in the markets, India’s currency touched a record low of 56.515 on May 31 as the government said gross domestic product expanded 5.3 percent in the January-March period, a nine-year low, compared with 6.1 percent in the previous quarter.

The rupee fell 0.6 percent to 56.46 against the dollar as of 10:15 a.m., and is headed for a 9.9 percent drop this quarter, the biggest loss since the first quarter of 1992.

The yield on benchmark 10-year sovereign bonds fell 43 basis points, or 0.43 percentage point, this quarter. The 8.15 percent bonds due 2022 yielded 8.07 percent today in Mumbai, according to the central bank’s trading system. The government announced record borrowing of 5.7 trillion rupees for the year ending March 31.

Sovereign Debt

The nation’s government bonds have returned 2.61 percent this quarter, the most among the top 10 Asian countries, according to HSBC Holdings Plc indexes. The extra yield on sovereign debt over Treasuries advanced two basis points to 648 today, according to data compiled by Bloomberg.

Credit-default swaps on State Bank of India, which some investors consider a proxy for the government, fell eight basis points this month to 372, 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 return for the underlying debt should a company fail to adhere to its agreements.

Power Finance will this week offer 1.5 billion rupees of five-year notes to yield 9.4 percent, and 10-year bonds at 9.39 percent, a person familiar with the matter said yesterday, asking not to be identified because the details are private.

Nabard Sale

National Bank for Agriculture is also planning a sale of at least 2 billion rupees of three-year notes priced to yield 9.35 percent, and five-year bonds at 9.3 percent, another person with details of the matter said June 19. The borrower, known as Nabard, issued 10 billion rupees of 9.5 percent June 2015 notes at the start of this month, the data show.

“We choose the best timing to raise funds from the bond market,” S.K. Mitra, Mumbai-based executive director at Nabard, said in a June 19 interview. “We don’t plan to reduce our borrowing plans this year.”

India’s benchmark wholesale inflation accelerated to 7.55 percent in May, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The government’s projected fiscal deficit of 5.1 percent of GDP in the year through March 2013 is the group’s widest.

“We may have to sacrifice growth in the short term to contain inflation which eventually will help us grow nearly as much as our potential rate in the medium term,” Subbarao said this week.

Rates Recalibrated

The surge in swap rates are “reflective of recalibration of market expectations about monetary easing,” Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered Plc said in an interview yesterday. “The prospects of significant rate cuts have diminished after the RBI unveiled its views on inflation and rates.”

Slowing growth and the widening fiscal gap may prompt the central bank to lower borrowing costs as early as July and help boost bond sales, according to R.V. Verma, chairman and managing director of National Housing Bank, which slashed sales 78 percent in the second quarter to 7.5 billion rupees.

“Slowing growth is as much as concern as inflation and therefore we believe that monetary easing is not further away,” Verma said in a telephone interview from New Delhi on June 18. “There will be respite soon.”

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