Indian Bonds to Tumble This Year on Rising Rates, JPMorgan Says
By Anil Varma
July 30 (Bloomberg) -- India's 10-year government bonds will tumble this year, boosting yields to the highest since 2001, as the central bank raises interest rates to curb inflation, according to JPMorgan Chase & Co.
Yields may climb to 11 percent by the end of December as the central bank boosts rates from a seven-year high to slow the fastest inflation in 13 years, Vikas Agarwal, a strategist in Mumbai at the third-biggest U.S. bank, said. JPMorgan was the only firm in a Bloomberg News survey to correctly predict the size of the Reserve Bank of India's rate increase yesterday.
``We haven't yet seen peaks in inflation, policy rates or bond yields in India,'' Agarwal said in an interview. ``Monetary-policy prospects remain decidedly hawkish.''
Ten-year yields are headed for the biggest monthly increase in at least a decade. The yield on the benchmark 8.24 percent note due in April 2018, which touched a seven-year high of 9.55 percent on July 11, climbed 71 basis points this month to close at 9.4 percent yesterday. A basis point is 0.01 percentage point.
Reserve Bank Governor Yaga Venugopal Reddy yesterday increased the overnight lending rate to 9 percent from 8.5 percent and also raised the proportion of deposits banks must hold in reserves to 9 percent from 8.75 percent. The central bank lifted this year's inflation forecast to 7 percent from between 5 percent and 5.5 percent.
Ten-year bond yields surged 1.61 percentage points so far this year, set for the biggest annual increase since at least 1999, as the inflation rate tripled to 11.89 percent in the week ended July 12 from a year earlier.
`Obvious Solution'
Higher interest rates are the ``obvious solution'' to rein in prices, India's Finance Secretary Duvvuri Subbarao said in an interview with Bloomberg Television on July 28.
Below-average rainfall may curb the nation's farm output and boost food prices, fanning inflation, according to Agarwal.
``Monsoon irregularities are adding to inflation concerns,'' he said. ``Planting of several crops such as cotton and sugar cane are already affected by poor rains.''
India's four-month monsoon rain, which accounts for four- fifths of the nation's annual rainfall, was below average for a third week this month, the New Delhi-based India Meteorological Department said July 24. Rains in July account for a third of the four-month monsoon season and are crucial for sowing crops.
Debt Sales
Increasing government debt sales may also damp demand for existing securities, Agarwal said.
``Pressure will mount on bond yields to rise because government spending is expected to exceed budgetary estimates, this being the pre-election year,'' he said. ``That would almost surely compel it to exceed its borrowing targets too.''
The cost of benchmark interest-rate swaps, derivative contracts used to guard against rate fluctuations, will rise as investors seek protection against higher borrowing costs, according to JPMorgan.
The five-year swap rate, a fixed payment made to receive floating rates, will rise 10.3 percent in two months from 9.65 percent in Mumbai yesterday, the bank forecasts. The rate touched a record high of 10.57 percent on July 1.
To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.
Last Updated: July 29, 2008 21:17 EDT |
