Billionaires Paying 10% for Cash Shows Muddled RBI: India Credit

Just when India’s biggest stimulus package in a decade was close to paying off, a cash crunch engineered by the central bank to shore up the rupee has pushed borrowing costs for leading companies back above 10 percent.

Billionaire Anil Ambani’s Reliance Capital Ltd. sold three-month commercial paper at 10.35 percent this week, compared with the 8.95 percent it paid for one-year funds in June. Three-month CP yields surged 249 basis points this month to a 16-month high of 10.91 percent yesterday, data compiled by Bloomberg show. Similar U.S. rates were at 0.23 percent.

Corporate bond sales plunged 96 percent in July as yields surged to a one-year high after the Reserve Bank of India, which eased policy as recently as in May, raised two of its interest rates and curtailed banks’ access to funds to arrest a slide in the rupee. Deutsche Bank AG said the RBI’s unexpected policy reversal gave a “muddled” message to investors, while Mizuho Bank Ltd. said the central bank’s measures lacked coherence.

“This is time when a weak credit would become worse as the problem is of funding,” Suyash Choudhary, who manages the equivalent of $6.1 billion as head of fixed income in Mumbai at IDFC Asset Management Co., said in an interview yesterday. “A tight funding environment for an elongated period of time can potentially further weaken the already-slow growth trajectory.”

Six-month CP yields have jumped 227 basis points, or 2.27 percentage points, this month to 11 percent, according to data compiled by Bloomberg.

Mirroring China

The surge in debt costs triggered by RBI Governor Duvvuri Subbarao’s surprise policy tightening is prompting businesses in India to avoid the bond and bill markets, after a record funds crunch in China caused a 47 percent slump in corporate issuance in June. The cash squeeze in India is threatening to erode gains from the past year’s pro-growth policies that included interest rate cuts and steps to allow more foreign holding in industries and markets. Asia’s No. 3 economy expanded 5 percent in the year ended March 31, the least in a decade, official data show.

The RBI raised two of its interest rates last week, while keeping the benchmark repurchase rate unchanged at 7.25 percent, to support the rupee. The currency lost almost 8 percent since March 31 in Asia’s worst performance, touching a record low of 61.2125 per dollar on July 8. It rose 0.4 percent to 58.91 today.

The benchmark five-year bond yield for Indian companies rated AAA by Crisil Ltd., the Indian unit of S&P, has risen 106 basis points since the RBI’s rate increases to 9.98 percent, according to data compiled by Bloomberg. The rate on 10-year sovereign notes climbed 74 basis points to 8.30 percent.

‘Uncertainty, Confusion’

Adding to its tightening measures, the RBI capped its daily fund support to lenders via repurchase auctions to 0.5 percent of deposits for each bank, according to a July 23 statement. The monetary authority also raised the daily balance requirement for lenders’ cash reserve ratio to 99 percent from 70 percent from July 27. It separately announced an auction of 60 billion rupees ($1 billion) of cash management bills to be held today.

“By not raising the repo rate and insisting that these measures are temporary, the RBI has tried to signal it is not tightening monetary policy, but at the same time it seems keen to make liquidity costly,” Taimur Baig, a Singapore-based economist at Deutsche Bank, wrote in a research note yesterday. “Adding policy uncertainty and confusion to the mix could chill investor sentiment even further.”

Indian companies may now prefer to negotiate with banks for more favorable rates on loans than to tap the securities market, according to Usha Martin Ltd., an Indian steelmaker.

Economic Stress

“After the RBI’s tightening measures, it is not advisable for companies that have good cash-credit lines with banks to tap the CP market,” G.D. Lakhotia, deputy general manager for finance at Kolkata-based Usha Martin. “Banks too have raised rates by 25 to 50 basis points, but the increase isn’t as drastic as the 200 basis point jump on commercial papers.”

Credit quality of Indian companies’ has declined to a five-year low amid the economic slowdown, increased funding costs and rising debt, according to the local unit of Fitch Ratings. Total liabilities at companies included in India’s BSE 500 share index have risen almost threefold since 2007-2008 and interest expenses surged 226 percent, according to the credit assessor.

“Given mounting economic stress, the credit metrics of corporates are unlikely to show a significant improvement” this fiscal year, analysts at India Ratings led by Mumbai-based Deep N. Mukherjee wrote in a July 17 report. “The current economic situation provides limited elbow room to the Reserve Bank of India to cut interest rates and for the government of India to embark on large-scale policy stimulus.”

Overseas Debt

The plunge in the rupee also threatens to boost costs for Indian companies facing at least $20 billion in overseas debt repayments in the coming year. Local borrowers including Reliance Industries Ltd. and Tata Steel Ltd. are due to redeem $18.7 billion of loans by mid-2014 and $1.1 billion in bonds, data compiled by Bloomberg show.

India’s about-turn on interest rates has fueled a record surge in bank funding costs, threatening to spur profit declines amid the slowest lending in four years. Three-month interbank money rates jumped 160 basis points to 9.81 percent on July 17 after the RBI’s rate increases. Loans in India climbed 13.7 percent in June from a year earlier, the least since 2009, even after the RBI eased policy three times in the first five months.

Default Risk

Royal Bank of Scotland Group Plc predicts the credit slump will be extended, weakening the economy. Costlier funding adds to the risk of defaults, according to Credit Suisse Group AG, spoiling banks’ efforts to revive profitability now at a five-year low.

Investors in India are bracing for monetary tightening. Three-month interest-rate swaps, contracts used to guard against fluctuations in borrowing costs, jumped 301 basis points in July to 10.45 percent yesterday, the highest since October 2008, according to data compiled by Bloomberg.

Bond risk for Indian companies is rising. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers has climbed 50 basis points from this year’s low in May to 269, according to data provider CMA.

“Borrowings will become costly for companies and that will put pressure on their bottom line, but this is likely to be for the short-term,” Killol Pandya, a senior debt fund manager in Mumbai at LIC Nomura Mutual Fund, said in an interview yesterday. “The economy as a whole is depressed, and such measures will add to that.”

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