Default swaps drop as RBI tackles housing bubble

India’s decision to tighten limits on home loans is boosting confidence that regulators were addressing asset bubbles, cutting the cost to protect bank debt from default and supporting a rally in government bonds.

Credit-default swaps tied to the debt of ICICI Bank, the nation’s second-biggest lender, fell 10 basis points (bps) last week to 189, the lowest since October 15, CMA data show. The yield on 10-year government bonds slid 13 bps to 7.99 per cent, the biggest decline since May, after the Reserve Bank of India (RBI) required lenders to set aside more capital against housing loans.

“The central bank will take pre-emptive action on sectors having the potential to fuel speculation and eventually inflation,” said Rajeev Radhakrishnan, who manages the equivalent of $9.2 billion of debt and equities at SBI Funds Management, a unit of the nation’s biggest bank.

RBI Governor D Subbarao said in a November 3 interview the six interest-rate increases this year had slowed inflation and that he favoured policy “supportive of growth,” while ensuring housing prices weren’t pushed up by speculators. RBI seeks targeted controls on investment in overheated areas, such as property and stocks, instead of slowing the whole economy by raising borrowing costs, according to SMC Global Securities and Mirae Asset India Investment Co.