Swaps Rebound as RBI Seen Reluctant to Cut Rates: India Credit

Swaps Rebound as RBI Seen Reluctant to Cut Rates
Consumer prices in India rose 9.86 percent in July, faster than the 1.8 percent in China, 5.2 percent in Brazil and 5.6 percent in Russia, data compiled by Bloomberg show. Photographer: Brent Lewin/Bloomberg

India’s interest-rate swaps are rebounding from a 14-month low, signaling that investors are scaling back expectations of further rate cuts in 2012 after growth in Asia’s third-largest economy unexpectedly quickened.

The fixed payment to lock in one-year rates has climbed 34 basis points to 7.82 percent since June 12, when it touched the lowest level since April 7, 2011. Similar contracts declined 29 basis points in Brazil and rose 18 basis points in Russia.

Growth last quarter rebounded from a year of declines, allowing central bank Governor Duvvuri Subbarao to focus on curbing the fastest inflation among the largest emerging markets after a poll showed households expect prices to surge. Eight of 11 analysts surveyed by Bloomberg News predict the Reserve Bank of India will keep borrowing costs unchanged at 8 percent at its Sept. 17 policy review, while two forecast a 25 basis point reduction and one expects a 50 basis point cut.

“We don’t expect any rate cuts in 2012,” Anubhuti Sahay, a Mumbai-based economist at Standard Chartered Plc, said in a telephone interview yesterday. “Inflation is still elevated and the RBI’s priorities are well outlined. We expect a 25 basis point rate cut in the first quarter of 2013.”

Gross domestic product rose 5.5 percent in the three months ended June 30, the statistics office reported on Aug. 31, exceeding the 5.2 percent gain predicted in a Bloomberg survey. The $1.8 trillion economy expanded 5.3 percent in the previous quarter, the slowest pace in three years.

Worst Inflation

Subbarao cut the RBI’s benchmark repurchase rate by 50 basis points in April after growth slowed for the fourth straight quarter. The rate at which the monetary authority lends to banks overnight was kept unchanged at the central bank’s reviews in June and July on concern inadequate rainfall will fuel the worst inflation rate among the so-called BRIC economies comprising Brazil, Russia, India and China.

Consumer prices in India rose 9.86 percent in July, faster than the 1.8 percent in China, 5.2 percent in Brazil and 5.6 percent in Russia, data compiled by Bloomberg show. India’s benchmark Wholesale Price Index rose 6.87 percent and has remained above the RBI’s 5 percent comfort level since December 2009.

The central bank in July raised its inflation forecast for the year ending March 31 to 7 percent from 6.5 percent, and reduced its GDP growth estimate to 6.5 percent from 7.3 percent. The revised prediction matched the previous year’s expansion.

‘Out of Hand’

An RBI survey of households in 12 cities across India in June and published on the central bank’s website on July 30 found that respondents expected prices of goods and services they consume to rise at a 12.8 percent pace in a year.

“With growth picking up, it’s safe to assume interest rates will be on hold for some time,” Ritesh Jain, the Mumbai-based head of investment at Canara Robeco Asset Management Ltd., which oversees the equivalent of $1.4 billion, said in an interview yesterday. “The primary concern is inflation as it seems to be getting out of hand.”

The yield on the government’s benchmark 10-year bonds has climbed 18 basis points, or 0.18 percentage point, to 8.22 percent from this year’s low of 8.04 percent on June 13, data compiled by Bloomberg show. The notes offer an extra yield of 665 basis points over similar-maturity U.S. Treasuries compared with a 98 basis-point premium for Chinese debt.

Growth may slip again as factory output slows and a revival in monsoon rains points to a possible moderation in inflation, according to Barclays Capital. That may allow the central bank to reduce borrowing costs in its Oct. 30 review.

Monsoon Revival

Manufacturing expanded at the slowest pace in nine months in August, a private survey by HSBC Holdings Plc and Markit Economics showed yesterday. The purchasing managers’ index fell to 52.8 from 52.9 in July. A reading above 50 indicates growth.

India’s June-September monsoon, which brings more than 70 percent of annual rainfall, was 12 percent below a 50-year average as of Sept. 2, the government-run weather bureau said. A revival in rainfall last month has helped narrow the deficit from 29 percent at the end of June. The nation’s more than 235 million farmers depend on rains to irrigate crops.

“The PMI slowdown will get reflected in future GDP numbers and central bank may cut rates by 100 basis points by March 2013,” Kumar Rachapudi, an interest-rate strategist at Barclays Capital in Singapore said in a telephone interview yesterday. “The improvement in the monsoon will help curb inflation.”

Growth Forecasts

Rachapudi predicts India’s economy may expand 5.8 percent in the fiscal year ending March 31, below the RBI’s revised forecast of 6.5 percent and the 6.7 percent rate predicted by Prime Minister Manmohan Singh’s Economic Advisory Council.

The 10-year bond yield may drop 72 basis points to 7.5 percent by the end of October if the repurchase rate is cut by 50 basis points then, he said. The benchmark yield was little changed today.

Prime Minister Singh’s ability to stimulate growth by increasing spending is restrained by his government’s pledge to reduce debt and pare its budget deficit to 5.1 percent of GDP this fiscal year from 5.8 percent in the previous 12 months.

Slower growth has increased India’s bond risk. The cost of insuring the debt of government-controlled State Bank of India, which some investors consider a proxy for the sovereign, climbed 63 basis points in the past 12 months to 340, according to data provider CMA.

Bond Risk

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements. An increase signals worsening perceptions of creditworthiness. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The rupee has depreciated 4.2 percent to 55.4150 per dollar this year, the second-worst performer among the 11 major Asian currencies tracked by Bloomberg. Indonesia’s rupiah has declined 5.4 percent.

“The central bank’s room to cut rates this month is fairly limited,” Gaurav Kapur, senior economist at Royal Bank of Scotland Group Plc in Mumbai, said in a telephone interview yesterday. “Any stimulus in the current environment may lead to more consumption and spur inflation rather than boosting growth.”

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