BS: Bond Rally Undermined as Fuel Controls Scrapped: India Credit
Dec. 22 (Bloomberg) -- The 9 percent jump in gasoline prices since the government scrapped controls in June may undermine the biggest bond rally in seven months, say Pramerica Asset Managers Pvt. and Development Credit Bank Ltd.
Two months of slowing inflation and a government plan to repurchase bonds helped reduce the yield on benchmark 2020 securities by 11 basis points this month to 7.96 percent, headed for the biggest decline since May. Indian Oil Corp. and Bharat Petroleum, the nation’s top state-run refiners by capacity, raised pump prices by 5.6 percent last week. The government also plans to review diesel prices, Petroleum Minister Murli Deora said on Dec. 13.
India has the highest 10-year borrowing costs among Asia’s major economies after the central bank raised interest rates six times this year to curb inflation. Goldman Sachs Group Inc. and Nomura Holdings Inc. predict the Reserve Bank of India will fail to meet its goal of containing price increases to a 5.5 percent rate by March from 7.5 percent now.
“Pressure remains on bond yields to rise on expectations of another round of fuel-price increases,” Mahendra Jajoo, head of fixed-income investments in Mumbai at Pramerica Asset Managers, the local unit of U.S.-based Prudential Financial Inc., said in an interview yesterday. “Crude oil is estimated to touch $100 a barrel.”
Diesel Prices
The government freed gasoline pump prices from government control on June 25, helping ease losses at state refiners as they sell fuels below cost. A panel of ministers may meet on Dec. 22 to consider increasing diesel prices by as much as 2 rupees a liter, the Press Trust of India reported on Dec. 13, citing a government official it didn’t identify.
The effect on inflation would be as much as 60 basis points should prices be raised by about 2 rupees a liter after including the impact on services such as transport, Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc., said in an interview on Dec. 16. Fuel and power account for about 15 percent of the wholesale price index, which India uses as the benchmark for inflation.
The yield on the 7.8 percent bonds maturing in May 2020 rose three basis points to 7.96 percent today before the central bank repurchases 120 billion rupees worth of debt to ease a shortage of cash at banks.
‘Biggest Headache’
The rate is 464 basis points, or 4.64 percentage points, more than similar-maturity U.S. Treasuries, compared with 375 at the end of last year, according to data compiled by Bloomberg. The yield is also 14 basis points more than Indonesia’s 7.82 percent, the second highest in Asia.
“Crude is the biggest headache for us which will drive inflation higher,” Anoop Verma, a bond trader at Mumbai-based Development Credit Bank, said in an interview on Dec. 21. “The yield on 10-year bonds will rise 10 basis points to around 8 percent within a month after diesel prices are raised by, say, 2 rupees.”
The difference in yields between India’s one- and 10-year securities has narrowed 64 basis points this month to a two-year low of 54. Pramerica Asset Managers’ Jajoo says short-term notes will suffer the most as the outlook for bonds remains “uncertain” over the “medium term.”
Government bonds in Asia’s third-biggest economy returned 5.2 percent this year, compared with 19.2 percent in Indonesia and 12.3 percent in the Philippines, according to indexes compiled by HSBC Holdings Plc.
Concerns about price pressures may prompt policy makers to delay raising diesel costs right away, according to N. R. Bhanumurthy, an economist at the New Delhi-based National Institute of Public Finance and Policy.
‘Political Fallout’
“There could be much more of a political fallout from raising diesel prices because that has a strong link to general price levels compared with gasoline,” he said in an interview yesterday. “Diesel prices may not be touched until after crucial state elections in the first quarter of next year.”
The widening gap between the cost of fuel production at the nation’s refiners and domestic retail prices makes a revision of pump prices a necessity, ICICI Bank, India’s second-largest lender, said in a research report yesterday. Crude-oil reached a 24-month high of $90.76 a barrel on Dec. 7 and traded at $90.18 today.
Current Account
The 13 percent increase in crude prices in 2010 prompted Barclays Plc to predict this month that the risk of India’s current-account deficit widening has increased “quite significantly.” The gap worsened to a record $13.7 billion in the three months ended June, official data show.
The nation’s currency underperformed this year on concern the deficit will widen. The rupee appreciated 3.2 percent, the fourth-worst performance among Asia’s 10 most-traded currencies, according to data compiled by Bloomberg. The rupee gained 0.3 percent today to 45.09 per dollar.
The cost of protecting the debt of government-owned State Bank of India, which some investors perceive as a proxy for the nation, increased one basis point to 159 today. The cost dropped to an eight-month low of 155 basis points on Dec. 16, according to CMA prices.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“If there is a further spike in commodity prices, that will have an impact on inflation,” Rajeev Radhakrishnan, a Mumbai-based money manager at SBI Funds Management Pvt. that oversees assets worth $9.2 billion. “And definitely yields will move up.”
--With assistance from Anurag Joshi, Anil Varma and V. Ramakrishnan in Mumbai. Editors: Ven Ram, Garfield Reynolds.
To contact the reporter on this story: Pratish Narayanan in Mumbai pnarayanan9@bloomberg.net. Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
