Mumbai: Indian swap rates jumped to an 11-month high and bond yields rose on Tuesday after the central bank chief discussed the dilemma over timing a withdrawal of accommodative policy and a rate hike in Australia fuelled concerns that easy money conditions would not last for long.
Indian stocks lagged Asian peers as top mobile carriers Bharti Airtel and Reliance Communications tumbled over 11% on worries that falling tariffs and increasing competition will hurt the sector’s profitability.
In a speech at the IMF-World Bank annual meeting in Istanbul late on Monday, Reserve Bank of India Governor Duvvuri Subbarao said while there was broad agreement India needed to wind back some of its easy policy stance, there were risks if the move was mistimed.
Australia’s central bank raised its key cash rate by 25 basis points to 3.25% on Tuesday and heralded more moves to come, saying it was safe to row-back on stimulus now that the worst danger for the economy had passed.
Australia’s rate hike, which surprised many in the market, was the first by a Group of 20 central bank as the global financial crisis eases and is seen as a harbinger of similar moves in other markets.
South Korea and India are viewed by many watchers as the first Asian markets likely to follow Australia by raising rates.
At 3;00pm, India’s benchmark five-year interest rate swap was at 6.71/75%, after rising to 6.73/78% in early trade, a level last tested on 5 November, 2008, according to Thomson Reuters data. It had ended at 6.64/69% on Monday.
The yield on the 10-year benchmark bond was at 7.20%, above Monday’s closing of 7.16%.
“Globally the central banks are gradually moving towards withdrawing excessive liquidity and the market is aware that such a move is imminent,” said Parijat Agrawal, head of fixed income at SBI Funds Management.
The Reserve Bank of India cut its key lending rate by 425 basis points between October 2008 and April 2009 and many watchers expect a tightening of liquidity and reserve requirements for banks in coming months, ahead of a hike in interest rates in the first quarter of 2010.
However, concerns of inflation speeding up faster than expected and overshooting the central bank’s projection of around 5 percent by end-March 2010 has fuelled speculation that the central bank could act sooner.
Analysts say a rate hike in Australia won’t force the Indian central bank’s hand as the economy is grappling with the effects of a weak monsoon and record government borrowings while Australia has a sound banking system and strong demand from China for its commodity exports.
“The rate hike in Australia wouldn’t materially alter what India would do. It has its own story and dynamics,” said Ramya Suryanarayanan, economist, at DBS in Singapore.
India’s government plans selling Rs4.51 trillion ($96 billion) of bonds in 2009/10 to finance its yawning fiscal deficit, which is projected to touch 6.8% of gross domestic product in 2009/10.
In interest rate futures on the National Stock Exchange, the December contract was implying a yield of 7.9884%, higher than 7.9252% on Monday.
The central bank will auction Rs9,500 crore of state loans on Tuesday, Rs9,000 crore of bills on Wednesday and the government will sell Rs10,000 crore of bonds on Friday.
However, bond yields remained supported on hopes the central bank would raise the hold-to-maturity limit for banks’ debt holdings as they would not have to report losses on bonds which have fallen sharply in value in 2009 due to the government’s record borrowing plans.
Further lending support were hopes the central bank would announce a bond buyback auction on Thursday ahead of Friday’s bond sale. The 10-year bond yield would find support around 7.25% and is unlikely to move up further, traders said.