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Finance minister's dividend drive sends bond risk to 3-year high

Bloomberg  |  New Delhi 

The cost of protecting against default in India is surging to a three-year high as investors bet that the government will fail to rein in the nation’s budget deficit even after pressing state-run companies for more dividends.

Five-year credit-default swaps insuring the bonds of State Bank of India, seen as a proxy for the nation, have risen 52 basis points since September to 405 basis points on January 9, the highest level since March 2009, according to CMA. Similar contracts on China’s debt declined 49 to 150.

Minister Pranab Mukherjee said on January 7 that cutting the deficit is a “serious challenge,” as the economy slows and subsidy payments rise. India may miss by at least 1 percentage point its goal to cut the budget gap to 4.6 per cent of gross domestic product by March, according to Standard Chartered Plc and ICICI Securities Primary Dealership Ltd.

“Even if they manage to raise the cash through alternate means, there will be a slippage in the fiscal deficit number,” said Nagaraj Kulkarni, a Mumbai-based fixed-income strategist at Standard Chartered. “If the recent trend of slowing revenue continues, then the government may not be able to consolidate its fiscal position.”

Minister Mukherjee expanded the government’s debt- sales program for the financial year ending March 31 by 8.5 per cent to a record Rs 5.1 lakh crore ($101 billion) last month, to bridge the shortfall in revenue.

Rally stalled
The increased debt sales are curbing a rally in government bonds even after data showed this week that India’s inflation rate fell to a two-year low in December. The benchmark wholesale-price index rose 7.47 percent last month from a year earlier, after gaining 9.11 percent in November, the Commerce Ministry reported on January 16.

The yield on India’s 8.79 per cent note due in November 2021 fell two basis points, or 0.02 percentage point, to 8.20 per cent, according to the central bank’s trading system. Standard Chartered’s Kulkarni forecasts that the 10-year yield will touch 8.5 per cent by March 31. Investors are demanding an extra yield of 635 basis points to hold the notes over similar- maturity US Treasuries, according to data compiled by Bloomberg.

Default swaps protecting against non-payment on the bonds of State Bank have more than doubled in the past year, advancing 206 basis points, according data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

‘New worry’
“The fiscal deficit is the new worry on the horizon for bonds now that inflation is on a downward trajectory,” Roy Paul, deputy general manager of treasury at Federal Bank Ltd in Mumbai said in an interview yesterday. “That is holding back a rally in bonds.”

The government is seeking alternatives to boost revenue after meeting only three per cent of a target to raise Rs 40,000 crore from the sale of stakes in state-owned firms in the year ending March 31, according to data provided by the Department of Disinvestment. The offerings have been delayed after India’s benchmark BSE Sensitive share index slid 25 per cent in 2011.

The country’s budget shortfall reached Rs 3.5 lakh crore, or 85.6 per cent of the annual target, in the eight months through November, the Controller General of Accounts said on its website on December 30. Tax receipts rose 48.2 per cent in the period from April to November, less than the 55.5 per cent advance recorded a year earlier.

‘Good dividends’

“We are expecting good dividends from the public sector companies this year,” R Gopalan, India’s economic affairs secretary, said in New Delhi on January 16.

Prime Minister Manmohan Singh said on January 8 that India’s economy will grow about seven per cent in the year ending March 31, less than the 7.5 per cent rate of expansion he predicted in December. Gross domestic product rose 6.9 per cent in the three months ended September 30, the least in two years, according to the most recent government data.

The extra yield investors demand to hold India’s 10-year bonds instead of one-year notes touched an eight-month high of 33 basis points on January 11, after the government raised its target for sales of longer-dated bonds.

Wider deficit
“As far as the bond market is concerned, the government has already borrowed extra and the fiscal deficit is higher than what was budgeted,” said Prasanna Ananthasubramanian, a Mumbai- based economist at ICICI Securities Primary Dealership, a unit of India’s second-biggest bank. “We’re looking at least 5.5 per cent on the deficit, even if they raise money from dividends. If they don’t raise the money, it will be six per cent.”

Indian bonds advanced this month, pushing 10-year yields down by the most since May 2010, as the central bank bought sovereign debt to ease a cash crunch at banks.

The Reserve Bank of India resumed open-market purchases of government notes after 10 months in November and has so far purchased Rs 61,400 crore of the securities in auctions, official data show.

“The increased supply of government debt is being negated by the RBI’s open-market bond purchases,” Vivek Rajpal, a fixed-income strategist in Mumbai at Nomura Holdings Inc, said in an interview yesterday.

Comparative returns
Bonds returned 8.3 per cent in the past year, while Indonesian debt earned 27 per cent to provide the best returns among 10 Asian fixed-income markets tracked by HSBC Holdings Plc. The rupee strengthened 0.4 percent on Wednesday to 50.51 per dollar.

State-owned National Aluminium Co. plans to boost dividend payments in the year through March, said Chairman B.L. Bagra, who attended the Jan. 12 meeting between Ministry officials and executives of state companies in New Delhi. The Bhubaneswar, India-based company, controlled 87.2 percent by the government, had 44.1 billion rupees of cash as of Sept. 30, according to data compiled by Bloomberg.

Coal India, the world’s biggest producer of the fuel, had 550 billion rupees of cash as of Sept. 30 and plans to use the money to increase output and pay more dividends, Chairman Nirmal Chandra Jha said on Sept. 22.

“The government is resorting to temporary measures to get control over the budget deficit,” Dharmakirti Joshi, Mumbai- based chief economist at Crisil Ltd., the local unit of Standard & Poor’s, said in an interview on Jan. 13. “What India needs to do is take durable and credible steps to cut the deficit.”


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To contact the editors responsible for this story: Sandy Hendry at;
Stephanie Phang at

First Published: Thu, January 19 2012. 00:18 IST