Fragile-Five Selloff Cuts Rupee Issues to ’07 Low: India CreditAnurag Joshi
India’s rupee bond market is the quietest since the global financial crisis as a selloff in emerging markets and inflation near 10 percent sap demand.
Corporate issuance dropped 63 percent so far this year to 53 billion rupees ($849 million), the least since the same period in 2007, according to data compiled by Bloomberg. While consumer-price inflation cooled to 9.87 percent last month from 11.16 percent in November, it was still the highest among 18 Asia-Pacific economies tracked by Bloomberg. That prompted the Reserve Bank of India to raise its repurchase rate a quarter-point to 8 percent on Jan. 28.
India’s currency dropped to its lowest level against the dollar since November this week amid a selloff in nations with current-account deficits including Turkey, Indonesia, Brazil and South Africa. While Axis Bank Ltd., the biggest underwriter of rupee debt in 2013, predicts offerings will rebound as Rural Electrification Corp. and Power Finance Corp. plan sales, inflation has prevented the central bank from shifting its focus to reversing the slowest economic growth in a decade.
“The central bank’s policy rate is less supportive to issuance now and inflation is still very high,” according to Mahendra Jajoo, Mumbai-based executive director at Pramerica Asset Managers Pvt. who manages $400 million in assets. “Action in the bond market will slow down after the RBI’s rate increase.”
Morgan Stanley first used the term “fragile five” in a report in August, amid an emerging-market rout caused by investors pulling out their money on speculation the Federal Reserve would soon reduce its bond purchases. That month, the rupiah, rand and real fell to the lowest levels in more than four years and the lira, like the rupee, was at its weakest rate ever.
Rupee-denominated note sales plunged in the second-half of 2013 to 704 billion rupees from 1.57 trillion rupees in the previous six months, when the central bank had reduced rates by 75 basis points, according to data compiled by Bloomberg. The RBI has raised the repurchase rate by 75 basis points since September to 8 percent to calm price pressures in Asia’s third-biggest economy.
The mounting price of goods and services in a nation where more than 800 million people live on less than $2 a day prompted Governor Raghuram Rajan to appoint a panel that has proposed making fighting inflation the “predominant objective” of monetary policy. The tighter stance has drawn calls from the government for the central bank to support economic growth, which fell to a decade low of 5 percent in the year ended March 31 2013.
“Inflationary expectations in the economy are still not fully contained,” said R.V. Verma, New Delhi-based chairman of National Housing Bank, the regulator for mortgage companies. “Issuers will either need to raise coupons on issuance to attract demand or defer sales to later months.”
Despite inflation remaining high, moderating prices of fruits and vegetables may give the RBI room to stay on hold, according to Axis Bank. The lender forecasts issuance will reach 500 billion rupees this quarter, up from 461 billion rupees in the three months ended Dec. 31. The cost of vegetables dropped 18.4 percent and fruits 1 percent in December from the previous month, according to government data.
Rates on three-year AAA rated local currency corporate debt are poised to end a two-month increase this month, falling 27 basis points to 9.58 percent, according to data compiled by Bloomberg.
Rural Electrification, a state-owned lender to power projects, plans a 5 billion rupee, five-year sale at a coupon of 9.63 percent, according to people familiar with the matter. Power Finance, the biggest seller of rupee-denominated notes in 2013, plans to issue seven-year securities in the local currency at 9.7 percent, separate people said.
“I see bond issuance rising this quarter as most companies will seek to borrow ahead of the financial year-end in March,” said Ajay Manglunia, Mumbai-based head for fixed-income markets at Edelweiss Financial Services Ltd.
Yields on 10-year government notes fell one basis point to 8.81 percent as of 9:13 a.m. in Mumbai. The rupee, the second-worst performer in Asia excluding the Japanese yen in 2013, rose 0.2 percent to 62.4250 per dollar.
Rajan raised interest rates this week even at the risk of friction with Prime Minister Manmohan Singh’s government, after Finance Minister Palaniappan Chidambaram said in a Jan. 23 interview the central bank has a duty to support growth.
Singh’s ruling Congress Party is trying to shore up economic growth before elections due by May in which it is set for its worst-ever performance, according to a poll for India Today published last week. The main opposition Bharatiya Janata Party is likely to pick up more seats in the lower house, the poll showed.
“The momentum of bond sales will be impeded as RBI’s rate increase was unexpected,” National Housing Bank’s Verma said.