India Borrowing Costs at 2001 High Threaten Singh Goal
A surge in Indian sovereign debt costs to a 12-year high this week is threatening Prime Minister Manmohan Singh’s plan to cut the budget deficit and fueling the fastest surge in credit risk since 2008.
Ten-year (GIND10YR) yields rose 72 basis points this month through yesterday to 8.92 percent, the most among 14 regional markets tracked by Bloomberg, touched the highest level since 2001 of 9.48 percent. They plunged 57 basis points today after the Reserve Bank of India said late yesterday it will buy long-dated notes via open-market auctions. Government debt in Indonesia added 68 basis points to 8.39 percent.
Singh’s pledge to reduce the shortfall in public finances to a six-year low of 4.8 percent looks more difficult to keep as borrowing costs soar amid an economic slowdown that would erode revenue. The rising costs of India’s 6.3 trillion rupee ($99 billion) borrowing program for the year through March 2014 will be apparent when the government sells 150 billion rupees of notes at an auction on Aug. 23.
“India’s macroeconomic situation appears to be nothing short of a train wreck,” Tirthankar Patnaik, a strategist in Mumbai at Religare Capital Markets Ltd., said in an interview yesterday. “Higher yields will make incremental borrowing expensive at a time when we expect a significant drop in tax revenue due to slow economic growth. The government might be forced to raise its borrowing target.”
Indian bonds are headed for a third monthly loss, with 10-year yields rising 112 basis points since May, as the prospect of the U.S. cutting stimulus fueled a plunge in the rupee. That’s equivalent to about 1.12 billion rupees in extra interest costs on every 100 billion rupees of such securities the government would auction.
The price to insure the notes of State Bank of India (SBIN), a proxy for the nation, against non-payment for five years climbed 113 basis points in August to 372, headed for the largest advance since October 2008, according to data provider CMA.
The rupee tumbled 14.5 percent since March in Asia’s worst performance and touched a record 64.12 per dollar yesterday. Its slide prompted the central bank to raise two of its interest rates and tighten cash in the financial system since mid-July, reversing an earlier policy bias for monetary easing.
The RBI said yesterday said it is important the liquidity-tightening measures don’t harden long-term yields, and announced steps to ease some curbs, including an open-market purchase of 80 billion rupees of long-dated notes on Aug. 23 and “thereafter calibrate them both in terms of quantum and frequency” based on market conditions.
Indian stocks rose after the RBI’s statement on planned bond purchases. The S&P BSE Sensex (SENSEX) gained 0.9 percent to 18,400.91 in Mumbai.
“Indian government bonds continue to remain under pressure,” analysts at ICICI Bank Ltd. (ICICIBC), including Mumbai-based L. Subramanian, wrote in a research note yesterday. “Continued weakness in the rupee has led to paring of bets of any further monetary easing by the Reserve Bank.”
At the last sovereign debt auction on Aug. 16, India sold 10-year notes at 8.74 percent, up from 7.28 percent on May 31. At this week’s sale, the government will offer securities due in 2020, 2025, 2032 and 2042. The nation’s budget gap in the first quarter of the fiscal year that started April 1 was 2.63 trillion rupees, or 48.4 percent of the target for the 12-month period, according to official figures released July 31.
Fiscal policy is the weakest aspect of Asia’s third-largest economy, Moody’s Investors Service said this week, while keeping its stable outlook on India’s Baa3 rating, the lowest investment grade. Standard & Poor’s last year cut the sovereign credit outlook to negative and a step closer to a junk ranking.
India’s growth slowdown is adding to hurdles faced by Singh as he seeks to improve public finances. Gross domestic product expanded 5 percent in the year ended March 31, the least in a decade, and is forecast by the central bank to increase 5.5 percent in the current period. Religare Capital estimates this fiscal year’s GDP gain may be as little as 4.5 percent.
Increasing public spending ahead of national elections in 2014 is also adding strain on the budget. Last month, Singh’s government enacted the Food Security Bill, which proposes to spend $21 billion a year to provide subsidized grain to about two-thirds of India’s 1.2 billion people. The policy could put at risk plans to cut the budget gap, according to Morgan Stanley.
“I’ll be surprised if the government manages to restrict the budget deficit to target without any economic or accounting arrangements,” Killol Pandya, senior fund manager in Mumbai at LIC Nomura Mutual Fund Asset Management Co., which manages 68 billion rupees of local assets, said in an interview yesterday. “At a time when India is going through an economic turmoil and immediately facing an election year, I don’t see how expenses can be cut down, and how revenues are going to be raised. We are under strain, let’s make no bones about it.”
Finance Minister Palaniappan Chidambaram has pledged to pare the budget deficit to 3 percent of GDP by 2017, part of wider policy changes since September to avert a rating downgrade and revive India’s economy. The shortfall declined to a revised 4.9 percent in 2012-2013 from 5.8 percent in the previous year.
The surge in yields provides an opportunity to buy Indian bonds, which would rally on any sign that the RBI will reverse its recent tightening measures, according to Mumbai-based Kotak Mahindra Asset Management Co.
“This is an extremely abnormal scenario as nobody expected yields to shoot up to these levels,” Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset, which manages 377 billion rupees of assets locally, said in an interview yesterday. “Of course, there will be bouts of near-term volatility, but investors should stay put and invest more rather than redeeming at this point. We should see genuine value buying with yields at such levels.”
There’s no sign of an immediate rebound in the bond market, according to LIC Nomura’s Pandya. Global funds have pulled out an unprecedented $10 billion from local-currency bonds since holdings touched a record $38.5 billion in May. Indian debt lost 2.4 percent so far in August, compared with a 1.25 percent decline in Chinese notes, JPMorgan Chase & Co. indexes show.
“It’s difficult to find a reason to be bullish,” he said. “The credit-default swap numbers are reflective of the stress the economy and India’s finances are experiencing.”
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