By Anil Varma, Bloomberg
Mumbai: Indian bonds may gain in the coming year as the Reserve Bank of India is close to ending a two-and-a-half-year cycle of interest-rate increases, Standard Chartered Plc says.
Yields on 10-year securities will fall more than half a percentage point to 7.45% by 2007-end, said Edward Lee, a Singapore-based senior strategist, and Shuchita Mehta, a Mumbai-based economist at Standard Chartered. Bonds may also gain as banks buy debt to meet reserve targets that rise in line with their deposits.
“Slower inflation will allow the Reserve Bank to be more relaxed in its monetary and liquidity management in the year ahead,” Lee said in an interview yesterday. “We will see fewer and fewer monetary measures in the coming quarters and that brightens the medium-term outlook for bonds.”
Standard Chartered predicts yields will drop this year for the first time in four allowing India to rely on its bond market to raise funds as it increases spending to spur growth that is the second fastest of the world’s major economies. The government plans to spend as much as 60% of the $320 billion the nation is estimated to need in the next five years to modernize transportation and power networks.
Benchmark 10-year yields rose to the highest in four-and-a-half years years in July as the RBI increased its benchmark interest rates eight times from October 2004 to curb inflation. The apex bank raised its overnight lending rate to a four-year high of 7.5% in January to cool demand stoked by economic growth.
The RBI also raised the amount of money banks must keep as cash reserves twice to drain money from the banking system, making credit costlier.
Indian government bonds handed investors a loss of 0.6% in the 12 months to yesterday, the second-worst performer of 10 Asian debt markets, according to indexes compiled by HSBC Holdings Plc.
The trend will reverse in 2007, Lee said, with the Indian 10-year yield having the second-biggest decline after Indonesia among comparable rates in the nine Asian markets he forecasts.
The yield on the benchmark 8.07% note due January 2017 was little changed at 7.95% as of 10:14 a.m. in Mumbai, up 40 basis points in the current fiscal year, according to Bloomberg data. It reached 8.4% in July 2006, the highest since December 2001. The yield climbed 86 basis points in the previous fiscal year and 1.53 percentage points the year before. A basis point is 0.01 percentage point.
A combination of fiscal and other measures announced by the government to cap commodity price gains and monetary steps taken by the central bank will slow inflation in coming months and lift bonds, Mehta said. The impact of accelerating prices this fiscal year will help lower the annual inflation rate next year, she said.
“The government is clearly determined to bring inflation down and has been acting from all three sides, using fiscal, monetary and supply side controls,” Mehta said. “We will see the results of these measures in the coming months. There’s also a favourable statistical base effect.”
India cut auto-fuel prices twice in the past three-and-a-half months and reduced tariffs on cooking oils, metals, cement and chemicals. The world’s second largest producer of wheat and rice banned futures trading in the two commodities last month to limit price gains. Last week, it asked cement producers not to raise prices for a year.
Inflation has averaged 6.3% since 1 January, compared with 5.5% the previous quarter and 5.1% in the three months ended 30 September, government data show. The rate may slow to 4.3% in the year starting 1 April, Lee said.
Bonds may also gain this financial year as economic growth slows for the first time in four years, giving the central bank more reason to keep rates on hold.
“India’s growth has peaked for now in our opinion,” Mehta said. “Costlier credit and an export deceleration, caused by slower global growth, will curb expansion.”
Asia’s fourth-largest economy will grow 9.2% in the year through March, accelerating for a third straight year, the government said 7 February. It grew 9% the previous year and 7.5% the year before. Growth may slow to 8.1% in the coming fiscal year, Standard Chartered forecasts.
Banks may increase purchases of debt as accelerating growth in deposits spur them to buy more securities, Lee said.
Deposits are rising as banks offer investors higher interest rates following increases by the central bank. Bank deposits grew 25% in the year ended 23 February, beating a 17% increase the previous year, central bank data show.
Banks will require bonds worth Rs1,15,000 crore ($26 billion) in the next fiscal to meet the stipulated reserve ratio if their deposits rise by 20%, even if RBI reduces the statutory liquidity ratio by 1 percentage point, Lee said.
That alone will account for 74% of the Rs1,55,000 crore of bonds the government plans to sell in the fiscal year, he said.