ICICI Sees RBI Rate Cuts Pushing Yields Below 7%
India’s largest private lender predicts 10-year sovereign bond yields will slide below 7 percent for the first time in four years as the central bank adds to three interest-rate cuts.
The Reserve Bank of India will lower its repurchase rate by 25 basis points or 50 basis points in the fiscal year through March, Shilpa Kumar, head of treasury at ICICI Bank Ltd. (ICICIBC), said in a June 3 interview. The benchmark yield has fallen 85 basis points, or 0.85 percentage point, in 2013 to 7.20 percent, data compiled by Bloomberg show. Similar-maturity debt dropped 14 basis points in China.
“Monetary policy has been cognizant of the need to support growth,” Kumar, 46, senior general manager for markets and proprietary trading, who joined ICICI in 1989, said at the bank’s headquarters in Mumbai. “Penciling in the kind of rate cuts we are looking at, we could see something sub-7 percent on the benchmark bond this year.”
Kumar, a former chairman of India’s fixed-income industry body, said the current-account deficit will narrow this year and price pressures will continue easing through September, extending the bond rally. RBI Governor Duvvuri Subbarao said May 14 that inflation at a 41-month low of 4.89 percent in April will be factored in the next monetary policy review on June 17.
Subbarao, who cut the benchmark rate by 75 basis points to 7.25 percent this year, said May 30 that while inflation has slowed in the last few months, gains in retail prices are “still high.” The record current-account deficit and slowing economic growth are a concern, he said in a speech. The governor told the Press Trust of India on June 3 that wholesale inflation at 5 percent is “comfortable.”
Gains in the benchmark wholesale price index averaged 7.55 percent in 2012 and 9.48 percent in 2011, official data compiled by Bloomberg show. A separate gauge of consumer prices rose 9.39 percent in April from a year earlier after peaking at 10.91 percent in February, according to government data.
Subbarao’s latest comment “pointed to a rising chance of a rate cut at the next meeting,” Sebastien Barbe, head of emerging markets research and strategy at Credit Agricole CIB in Paris, wrote in a research report yesterday. “The rupee should benefit, as should Indian bonds.”
The currency advanced 0.6 percent to 56.4525 per dollar yesterday, paring its decline this year to 2.6 percent, according to data compiled by Bloomberg. The yield on the 7.16 percent note due May 2023 fell five basis points to 7.20 percent. India’s 10-year sovereign debt offers a premium of 507 basis points over similar-maturity U.S. Treasuries.
India’s bond risk has declined. The cost of insuring the debt of State Bank of India (SBIN), considered a proxy for the sovereign, using five-year credit-default swaps, has fallen 34 basis points since Dec. 31 to 192, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
Inflation in India should soften as the government may raise the prices at which it buys food from farmers by less than last year, ICICI’s Kumar said. The government offers to purchase crops from farmers at a “minimum support price” and sells them to the poor at subsidized rates.
Consumer prices will increase an average 8.55 percent in the year through March 2014, according to the median of 10 estimates in a Bloomberg survey, compared with 10.2 percent in the previous 12 months. Food contributes about 50 percent to consumer prices. Gains in wholesale prices will slow to an average 6.30 in the same period from 7.4 percent, a separate survey shows.
“Food prices are not going to come down anytime soon,” Paresh Nayar, head of fixed-income and currencies trading at FirstRand Ltd. (FSR) in Mumbai, said in a June 4 telephone interview. “We had been expecting a rate cut in June, but have put our view on hold after the RBI’s comments” on May 30, he said.
Asia’s third-largest economy expanded 5 percent in the 12 months ended March, the Central Statistical Office said May 31. That was the weakest in a decade and compares with a 10-year average of about 8 percent. Prime Minister Manmohan Singh’s efforts to boost investment floundered as protests over alleged graft disrupted parliament, impeding bills to simplify taxes and provide more land for industry.
Subbarao has said the current-account deficit and inflation risks limit room for reducing interest rates further. The RBI has sought to bring down borrowing costs by reducing the proportion of deposits banks are required to hold as cash reserves to an almost 40-year low of 4 percent, and by pumping in money into the financial system by buying government bonds.
Kumar said ICICI predicts GDP growth will accelerate to 6 percent in the current fiscal year, with consumption rather than investment as the main driver. The current-account deficit will narrow to below 4 percent of GDP in the period from a record of around 5 percent largely due to lower global commodity prices, Kumar predicted.
“From January 2012 till now, we’ve had times when we felt inflation was at a difficult place, when we felt growth needed some support,” she said. “And at every point in time, though the central bank cautioned on inflation, we’ve had a series of cuts either in the cash-reserve ratio or the repo rate.”
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