India’s monsoon has revived too late to help Prime Minister Manmohan Singh curb the worst inflation among the largest emerging markets, dimming prospects of interest-rate cuts and threatening Asia’s best bond rally.
Standard Chartered Plc predicts the 10-year government bond yield will rise 33 basis points, or 0.33 percentage point, to 8.50 percent by Sept. 30, while Daiwa Asset Management Co. forecasts an 8.35 percent rate. Indian debt has returned 6.54 percent this year, beating South Korea’s 6.42 percent and Indonesia’s 5.86 percent, HSBC Holdings Plc indexes show.
“Inflation will remain at elevated levels and the revival in the monsoon won’t help to bring food prices down,” Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered, said in a Sept. 5 interview. “The Reserve Bank of India isn’t going to cut rates in a hurry.”
The RBI will keep borrowing costs at the highest level among major Asian economies at its Sept. 17 policy review, 10 of 13 analysts surveyed by Bloomberg say, while three expect a reduction. Governor Duvvuri Subbarao has pledged to contain inflation at the cost of sacrificing some growth. Government reports show a decline in crop planting even as downpours in recent weeks helped narrow the rainfall deficit to 10 percent below the 50-year average from 29 percent at the end of June.
“Rains have improved but were late,” M. Sitaramaswamy, 70, who grows rice on 13 acres in the southern state of Andhra Pradesh, said in a telephone interview yesterday. “This has delayed transplanting of rice paddy and will reduce harvests.”
India, the world’s second-biggest grower of rice and sugar cane, has seen the area under monsoon-sown crops drop 6 percent from a year earlier to 95.4 million hectares, the agriculture ministry said Aug. 31. Planting of rice, oilseeds and cotton declined from a year earlier, it said.
“The RBI has been distinctly hawkish in talking about the need for lower inflation,” said Killol Pandya, the Mumbai-based head of fixed-income investments at the local unit of Daiwa. “Appetite for bonds is subdued because the outlook for rate cuts is bleak,” he said in a Sept. 5 telephone interview.
The 10-year yield has dropped to 8.17 percent from this year’s high of 8.78 percent reached on April 5 as growth in Asia’s third-largest economy slumped to the slowest pace since 2009, data compiled by Bloomberg show. The notes offer an extra 647 basis points over comparable U.S. Treasuries compared with a 172 basis-point premium for Chinese debt.
The rupee has weakened 17 percent against the U.S. dollar in the past year, the worst performance among the 11 major Asian currencies tracked by Bloomberg. The currency rose 0.1 percent to 55.5850 today.
The June-September monsoon season accounts for more than 70 percent of India’s annual rainfall and is the main source of irrigation for the nation’s 235 million farmers. Rains revived last month, easing drought conditions in more than 50 percent of the country, according to the government’s weather office.
The country received 675.4 millimeters of rainfall from June 1 to Sept. 5, the India Meteorological Department said on its website. That’s less than the 748.5 millimeters average considered normal for the period.
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 estimate for growth in gross domestic product to 6.5 percent from 7.3 percent. The revised prediction matched the previous year’s expansion.
Gains in wholesale prices have averaged 7.3 percent this year, data compiled by Bloomberg show, partly because food inflation accelerated to 10 percent in July compared with deflation of 0.7 percent in January, according to official data. Food costs may rise further as farmers want the government to increase prices at which it buys produce.
“The government should increase the minimum-support price as production is going to fall this year,” said Sitaramaswamy from Andhra Pradesh.
India raised the minimum price of rice to a record 1,250 rupees ($22.4) per 100 kilograms, Finance Minister Palaniappan Chidambaram said June 14. The government is set to consider a 20 percent increase in the price of mustard seeds to boost output, two government officials who asked not to be named said Aug. 24.
Higher procurement prices will increase food costs and fuel inflation expectations, said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai.
“It complicates the RBI’s job,” she said by telephone yesterday. “Rising minimum prices also add to the fiscal burden of the government.”
Prime Minister Singh has pledged to reduce the government’s budget deficit to 5.1 percent of GDP this fiscal year from 5.8 percent in the previous 12 months.
GDP rose 5.5 percent in the three months ended June 30, the government said Aug. 31. The $1.8 trillion economy expanded 5.3 percent in the previous quarter, the least in three years.
Weak growth and high inflation have 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 46 basis points in the past 12 months to 333, according to data provider CMA.
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.
“Food prices depend not only on the quantity of rainfall but its distribution, and that hasn’t been good,” said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai, who predicts 7.5 percent to 8.5 percent inflation until March 2013. “I don’t expect an easing in interest rates for another three months. After that the RBI may cut rates depending on the inflation scenario.”