Swaps Doubling Signal Traders Prepared for January Rate Rise: India Credit
India’s central bank will probably resume Asia’s fastest round of interest-rate increases next month, after pausing tomorrow, on signs money-market traders are bracing for a revival in inflation.
The difference between one-year interest-rate swaps and the benchmark repurchase rate doubled to a six-week high of 73 basis points today from 35.5 basis points when India last lifted rates on Nov. 2. The Reserve Bank of India may raise the repurchase rate to 6.5 percent from 6.25 percent on Jan. 25 after keeping it unchanged at noon tomorrow, according to 11 of 16 economists in Bloomberg News survey. Only three of 15 polled last week saw a January move.
Governor Duvvuri Subbarao, who has boosted the repurchase rate by 1.5 percentage point in 2010, the most in Asia, needs to gain control over costs in a nation where 828 million people live on less than $2 a day. While a report yesterday showed wholesale-price inflation slowed to an 11-month low of 7.48 percent in November from 8.58 percent in October, the rate is still higher than the 5.1 percent in China and 5.6 percent in Brazil.
“The central bank isn’t done yet with rate tightening,” said Rajeev Malik, a senior economist at CLSA Asia Pacific Markets. “The RBI will come back in January and hike rates to contain inflation.”
The one-year swap rate, the fixed cost to receive a floating interest rate, advanced 38 basis points, or 0.38 percentage point, since Nov. 2 to 6.98 percent, data compiled by Bloomberg show. The similar rate in China climbed 77 basis points in that period to 3.14 percent, while Russia’s rose 51 basis points to 5.24 and Brazil’s climbed 59 basis points to 11.81 percent.
Subbarao said last week that inflation remains above the “tolerance level” of between 4 percent and 4.5 percent.
An RBI survey of price expectations of 4,000 households in urban areas showed a separate inflation index may quicken to 12.7 percent in the next year from 12.1 percent now, according to a Dec. 9 statement from the central bank. A report on Dec. 10 showed India’s industrial production rose 10.8 percent in October, faster than the 8.5 percent median forecast in a Bloomberg survey of economists, signaling consumer demand remains strong in Asia’s third-largest economy.
“Inflation may trend down gradually but the level will remain uncomfortably high,” Tushar Poddar, Mumbai-based economist at Goldman Sachs Group Inc., wrote in a note on Dec. 2. “Core inflation will move sequentially higher due to increasing domestic demand and rising asset and commodity prices.”
Inflation may average 6 percent in the year starting April 1, said Poddar, who predicted 1 percentage point in rate increases by December 2011, more than his previous forecast of between 50 basis points and 75 basis points.
The worst cash crunch in 10 years may prompt the central bank to hold off on interest rates for another month as it buys government securities to alleviate fund shortages, Ashutosh Datar, a strategist at IIFL Ltd., a Mumbai-based Indian brokerage.
“The RBI may pause in December to assess the impact of the previous rate moves and because of the cash crunch,” said Datar. Even so, “inflation pressures are building up strongly,” he said.
The yield on India’s benchmark 2020 security has dropped nine basis points from a 26-month high of 8.21 percent in the past week as the Reserve Bank bought back 101 billion rupees ($2.2 billion) of securities. The rate rose three basis points today to 8.12 percent.
Overnight loan rates between banks averaged 6.6 percent this month, compared with 3.3 percent a year ago. Banks borrowed an average 824 billion rupees a day this quarter using the Reserve Bank’s repurchase auction window, compared with 239 billion rupees in the previous three months, according to data compiled by Bloomberg, indicating a shortage of money.
Deputy Governor Subir Gokarn told reporters in Kolkata last week that the move to replenish funds isn’t a sign of a change in monetary policy.
The rupee dropped 0.7 percent today to 45.27 per dollar, according to data compiled by Bloomberg. The currency advanced 2.7 percent this year as foreign funds poured a record $9.6 billion into rupee debt, driving the Bombay Stock Exchange’s Sensitive Index up by 14 percent.
While the RBI’s repurchase rate is 6.25 percent, the U.S. Federal Reserve’s target for overnight interbank loans is zero to 0.25 percent, where it has been since December 2008. As a result, the spread between India’s debt due in a decade and 10- year Treasuries, has widened 46 basis points since the South Asian nation’s first rate increase on March 19 to 461 today. The gap, which has averaged 317 in the past decade, reached a decade’s high of 567 on Oct. 20.
“A widening interest-rate differential coupled with the relatively open stance toward capital inflows points to further rupee appreciation,” said Vishnu Varathan, Singapore-based economist at Capital Economics Ltd. Varathan last week forecast a quarter-point increase in the repurchase rate in January from an earlier prediction of no change. He said the rupee may gain to 42 against the dollar by the end of 2011.
Local-currency debt returned 4.4 percent in 2010, according to indexes compiled by HSBC Holdings Plc, as the Reserve Bank tightened its monetary policy. Investors in China earned 1.5 percent, the least in the region, the indexes show.
State Bank Debt
Prices of five-year credit-default swaps used to protect against losses on the debt of India’s largest lenders fell in the past three months, according to data provider CMA. Swap prices dropped 27 basis points for State Bank of India, the nation’s largest lender, and 32 basis points for ICICI Bank Ltd., the country’s second-biggest lender. The swaps are used to protect against missed debt payments.
Price pressures in India may also emerge after companies including Bharat Petroleum Corp. raised gasoline prices yesterday and as Prime Minister Manmohan Singh’s government plans to cut subsidy to state refiners, including Indian Oil Corp., that sell fuel below costs. The government partly compensates refiners for their losses, which increase as crude prices rise.
Crude in New York trading reached $90.76 a barrel on Dec. 7, the highest level since Oct. 8, 2008. Oil has gained 12 percent this year. India, which imports three-quarters of its crude oil needs, is working on a plan to boost diesel prices, Petroleum Minister Murli Deora said Dec. 13.
“Inflation is a big worry,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd in Mumbai. “A rate hike seems to be on the cards in January given the risks to inflation from growth and rising commodity prices.”
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