Just when India’s biggest stimulus
package in a decade was close to paying off, a cash crunch
engineered by the central bank to shore up the rupee has pushed
borrowing costs for leading companies back above 10 percent.
Billionaire Anil Ambani’s Reliance Capital Ltd. sold three-month commercial paper at 10.35 percent this week, compared with
the 8.95 percent it paid for one-year funds in June. Three-month
CP yields surged 249 basis points this month to a 16-month high
of 10.91 percent yesterday, data compiled by Bloomberg show.
Similar U.S. rates were at 0.23 percent.
Corporate bond sales plunged 96 percent in July as yields
surged to a one-year high after the Reserve Bank of India, which
eased policy as recently as in May, raised two of its interest
rates and curtailed banks’ access to funds to arrest a slide in
the rupee. Deutsche Bank AG said the RBI’s unexpected policy
reversal gave a “muddled” message to investors, while Mizuho
Bank Ltd. said the central bank’s measures lacked coherence.
“This is time when a weak credit would become worse as the
problem is of funding,” Suyash Choudhary, who manages the
equivalent of $6.1 billion as head of fixed income in Mumbai at
IDFC Asset Management Co., said in an interview yesterday. “A
tight funding environment for an elongated period of time can
potentially further weaken the already-slow growth trajectory.”
Six-month CP yields have jumped 227 basis points, or 2.27
percentage points, this month to 11 percent, according to data
compiled by Bloomberg.
Mirroring China
The surge in debt costs triggered by RBI Governor Duvvuri Subbarao’s surprise policy tightening is prompting businesses in
India to avoid the bond and bill markets, after a record funds
crunch in China caused a 47 percent slump in corporate issuance
in June. The cash squeeze in India is threatening to erode gains
from the past year’s pro-growth policies that included interest
rate cuts and steps to allow more foreign holding in industries
and markets. Asia’s No. 3 economy expanded 5 percent in the year
ended March 31, the least in a decade, official data show.
The RBI raised two of its interest rates last week, while
keeping the benchmark repurchase rate unchanged at 7.25 percent,
to support the rupee. The currency lost almost 8 percent since
March 31 in Asia’s worst performance, touching a record low of
61.2125 per dollar on July 8. It rose 0.4 percent to 58.91
today.
The benchmark five-year bond yield for Indian companies
rated AAA by Crisil Ltd., the Indian unit of SP, has risen 106
basis points since the RBI’s rate increases to 9.98 percent,
according to data compiled by Bloomberg. The rate on 10-year (GIND10YR)
sovereign notes climbed 74 basis points to 8.30 percent.
‘Uncertainty, Confusion’
Adding to its tightening measures, the RBI capped its daily
fund support to lenders via repurchase auctions to 0.5 percent
of deposits for each bank, according to a July 23 statement. The
monetary authority also raised the daily balance requirement for
lenders’ cash reserve ratio to 99 percent from 70 percent from
July 27. It separately announced an auction of 60 billion rupees
($1 billion) of cash management bills to be held today.
“By not raising the repo rate and insisting that these
measures are temporary, the RBI has tried to signal it is not
tightening monetary policy, but at the same time it seems keen
to make liquidity costly,” Taimur Baig, a Singapore-based
economist at Deutsche Bank, wrote in a research note yesterday.
“Adding policy uncertainty and confusion to the mix could chill
investor sentiment even further.”
Indian companies may now prefer to negotiate with banks for
more favorable rates on loans than to tap the securities market,
according to Usha Martin Ltd., an Indian steelmaker.
Economic Stress
“After the RBI’s tightening measures, it is not advisable
for companies that have good cash-credit lines with banks to tap
the CP market,” G.D. Lakhotia, deputy general manager for
finance at Kolkata-based Usha Martin. “Banks too have raised
rates by 25 to 50 basis points, but the increase isn’t as
drastic as the 200 basis point jump on commercial papers.”
Credit quality of Indian companies’ has declined to a five-year low amid the economic slowdown, increased funding costs and
rising debt, according to the local unit of Fitch Ratings. Total
liabilities at companies included in India’s BSE 500 share index
have risen almost threefold since 2007-2008 and interest
expenses surged 226 percent, according to the credit assessor.
“Given mounting economic stress, the credit metrics of
corporates are unlikely to show a significant improvement” this
fiscal year, analysts at India Ratings led by Mumbai-based Deep N. Mukherjee wrote in a July 17 report. “The current economic
situation provides limited elbow room to the Reserve Bank of
India to cut interest rates and for the government of India to
embark on large-scale policy stimulus.”
Overseas Debt
The plunge in the rupee also threatens to boost costs for
Indian companies facing at least $20 billion in overseas debt
repayments in the coming year. Local borrowers including
Reliance Industries Ltd. (RIL) and Tata Steel Ltd. (TATA) are due to redeem
$18.7 billion of loans by mid-2014 and $1.1 billion in bonds,
data compiled by Bloomberg show.
India’s about-turn on interest rates has fueled a record
surge in bank funding costs, threatening to spur profit declines
amid the slowest lending in four years. Three-month interbank
money rates jumped 160 basis points to 9.81 percent on July 17
after the RBI’s rate increases. Loans in India climbed 13.7
percent in June from a year earlier, the least since 2009, even
after the RBI eased policy three times in the first five months.
Default Risk
Royal Bank of Scotland Group Plc predicts the credit slump
will be extended, weakening the economy. Costlier funding
adds to the risk of defaults, according to Credit Suisse
Group AG, spoiling banks’ efforts to revive profitability
now at a five-year low.
Investors in India are bracing for monetary tightening.
Three-month interest-rate swaps, contracts used to guard against
fluctuations in borrowing costs, jumped 301 basis points in July
to 10.45 percent yesterday, the highest since October 2008,
according to data compiled by Bloomberg.
Bond risk for Indian companies is rising. The average cost
of five-year credit-default swaps insuring against non-payment
by seven local issuers has climbed 50 basis points from this
year’s low in May to 269, according to data provider CMA.
“Borrowings will become costly for companies and that will
put pressure on their bottom line, but this is likely to be for
the short-term,” Killol Pandya, a senior debt fund manager in
Mumbai at LIC Nomura Mutual Fund, said in an interview
yesterday. “The economy as a whole is depressed, and such
measures will add to that.”
To contact the reporter on this story:
Divya Patil in Mumbai at
dpatil7@bloomberg.net
To contact the editor responsible for this story:
James Regan at jregan19@bloomberg.net
Reliance Capital Chairman Anil Ambani
Qilai Shen/Bloomberg
Billionaire Anil Ambani, chairman of Reliance Capital Ltd.
Billionaire Anil Ambani, chairman of Reliance Capital Ltd. Photographer: Qilai Shen/Bloomberg
Billionaires Paying 10% for Cash Shows Muddled RBI
Dhiraj Singh/Bloomberg
The RBI raised two of its interest rates last week, while keeping the benchmark repurchase rate unchanged at 7.25 percent, to support the rupee.
The RBI raised two of its interest rates last week, while keeping the benchmark repurchase rate unchanged at 7.25 percent, to support the rupee. Photographer: Dhiraj Singh/Bloomberg
Billionaires Paying 10% for Cash Shows Muddled RBI: India Credit
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