Goldman Rate-Cut Call Gains Ground in Swap Market: India Credit

Goldman Sachs Group Inc.’s call for a half percentage point interest-rate cut by India’s central bank this month is gaining support in the swap market, where borrowing costs fell for the third quarter.

The price of derivative contracts that fix rates for a year fell two basis points last quarter to 7.61 percent, taking the drop since March to 42 basis points, data compiled by Bloomberg show. A similar measure rose 19 basis points to 3.34 percent in China. Speculation that the Reserve Bank of India will ease policy is strengthening after the government cut its estimate for economic growth in the year through March to as little as 5.7 percent, the least in a decade, on Dec. 17.

RBI Governor Duvvuri Subbarao said last month that policy makers’ focus needs to shift toward supporting the economy from curbing inflation. Goldman Sachs forecasts the repurchase rate, held at 8 percent since April, will be lowered to 7.5 percent at the next review on Jan. 29, while BNP Paribas SA sees a 25 basis point reduction. Eleven of 20 analysts surveyed by Bloomberg see a 50 basis point decrease by March 31.

“Indian markets are positioning for a rate-cutting cycle, given the shift in RBI’s focus to growth from inflation,” Nagaraj Kulkarni, a Singapore-based strategist at Standard Chartered Plc, said in an interview yesterday. “We expect a 25 basis point reduction in the repo rate this quarter.”

Rate Outlook

The one-year swap rate has slid 67 basis points, or 0.67 percentage point, from its 2012 peak of 8.26 percent in February, according to data compiled by Bloomberg. The measure declined seven basis points since Subbarao said Dec. 18 that slowing inflation increases room for the central bank to ease policy. Annual gains in the nation’s benchmark price index slowed to 7.24 percent in November, the least since January.

The RBI has held its repo rate unchanged since April, when it was lowered by 50 basis points in the first reduction since 2009. The benchmark was boosted by a record 375 basis points, or 3.75 percentage points, through 2010 and 2011 to contain the fastest price increases among the largest emerging markets.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the RBI said in a statement on Dec. 18.

Easing Cash

Swap rates also declined as Subbarao took steps to ease a cash squeeze at banks. Three-month interbank funding costs fell by 92 basis points in 2012 to 8.92 percent as the RBI pumped more than 2.7 trillion rupees into the financial system by cutting lenders’ reserve requirements and buying sovereign debt. The monetary authority cut the proportion of deposits lenders must set aside as reserves by 175 basis points last year to a 36-year low of 4.25 percent.

The yield on 10-year government bonds slid 52 basis points in 2012 as traders boosted rate-cut bets. The yield on the benchmark 8.15 percent debt due June 2022 fell six basis points today to 7.99 percent today, offering an extra amount of 629 basis points over U.S. Treasuries, while the rupee advanced 0.3 percent to 54.8150 per dollar.

“We have a constructive outlook on Indian government bonds,” Standard Chartered’s Kulkarni said. “Bonds are lagging the swap curve in pricing in forthcoming rate cuts.”

The cost to insure the debt of government-controlled State Bank of India, a proxy for the sovereign, for five years slid 172 basis points last year to 223, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets. Credit- default swaps for China fell 82 basis points to 65.

“Growth is a concern and expectations for a rate cut are quite legitimate given that headline inflation is coming lower,” Lakshmi Iyer, Mumbai-based head of fixed income at Kotak Mahindra Asset Management Co. overseeing the equivalent of $5.6 billion, said in an interview yesterday. “Markets are pricing in a cut in the repo rate on Jan. 29 to 7.75 percent or even 7.5 percent.”

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