The rally in rupee, Asia’s best performer in the past month, is showing no signs of slowing as record share sales by companies spur global money managers to add to unprecedented investments in the nation’s stocks.
The currency rose five per cent in the month ended October 8, as this year’s equity offerings climbed to Rs 79,400 crore ($18 billion), thus surpassing 2007’s peak of Rs 78,200 crore, data compiled by Bloomberg show. State-owned Coal India Ltd plans to raise Rs 15,000 crore this month in India’s biggest initial public offer (IPO).
Steel Authority of India, the nation’s second-biggest producer of the metal, may sell next month. Global investors have poured $22 billion into India’s shares this year and $10 billion into its debt to profit from an economy growing faster than eight per cent a year and government bond yields that exceed seven per cent. Interest-rate swaps rose the most since the period ended September 17 last week, suggesting investors anticipated higher central-bank borrowing costs.
“The share sales should go down well, attracting more inflows as the Indian growth story remains very impressive,” said Mitul Kotecha, the Hong Kong-based head of global foreign-exchange strategy at Credit Agricole Corporate and Investment Bank.
Inflows may accelerate after emerging-market equity funds attracted more than $6 billion in the week ended October 6, the most since 2007, and developed nations pumped cash into their economies to revive growth, according to EPFR Global.
The rupee rose in each of the past six weeks, the longest streak in a year, and climbed to 44.11 on October 7, its strongest level since September 2008. It has strengthened 1.3 per cent this month, extending September’s 4.7 per cent advance. Brazil’s real climbed four per cent last month, China’s yuan appreciated 1.7 per cent and Russia’s ruble gained 0.8 per cent.
Elsewhere in India’s credit markets, the nation’s benchmark government bond fell for a second straight week, relative yields on corporate bonds rose from last month’s lows and Essar Energy Plc is planning its first foreign-currency bond sale to repay rupee-denominated loans used for power and refinery projects.
Rising yields
The yield on India’s 7.8 per cent note due May 2020 climbed nine basis points (bps), or 0.09 percentage point, last week, the most in almost two months, to 7.99 per cent, and remained at that level on Monday. The government raised Rs 11,000 crore through bond sale on October 8. It sold seven-year notes at a maximum yield of 7.92 per cent, 12-year debt at as much as 8.08 per cent and 30-year securities at 8.42 per cent.
The difference in yields between Indian debt due in a decade and similar-maturity US treasuries widened 19 bps last week to a record 5.58 percentage points. The gap has expanded from 3.75 percentage points at the end of 2009, as the Reserve Bank of India (RBI) raised interest rates five times this year. The pace of increases in the nation’s wholesale price index slowed to 8.5 per cent in August from 11 per cent in April.
“RBI has been pretty aggressive in raising interest rates and that has kept the yield attraction on the rupee intact,” Credit Agricole’s Kotecha said. “Inflation is now easing and that too bodes well for the currency.”
The cost of fixing rates on money for three years, with interest-rate swaps, rose 13 bps last week to 6.95 per cent, Bloomberg data show. The rate local banks charge each other to borrow overnight was 6.3 per cent, higher than the central bank’s lending rate of six per cent.
Corporate bonds
In India’s corporate bond market, the difference in yield between top-rated three-year company debt and similar-maturity government securities was 97.5 bps, up from last month’s low of 80.84 on September 17, Bloomberg data show.
London-listed Essar Energy, controlled by billionaires Shashi and Ravi Ruia, will seek a credit rating and may sell notes with seven-or eight-year maturities, Chief Financial Officer P. Sampath said in Mumbai last week.
“We’ll raise the money to refinance some of the Indian high-cost debt,” he said, declining to say how much Essar might seek. “There are opportunities to raise one to two percentage points of savings compared to what we’re paying on Monday.”
ICICI Bank and Reliance Industries are among the Indian companies preparing to tap demand for emerging-market bond yields as Japanese and US rates remain near zero.
IMF boost estimates
On October 6, the International Monetary Fund (IMF) raised its 2010 growth forecast for the nation’s gross domestic product to 9.7 per cent from a July estimate of 9.4 per cent.
India is considering allowing individual overseas investors to directly buy stocks for the first time, easing a rule that restricts investment to mutual funds, a finance ministry official with direct knowledge of the matter said on october 8. The government raised its cap on foreign purchase of bonds by 50 per cent to $30 billion last month.
“All these are working in favor of strong inflows into the system,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. Sahay expects the rupee to trade at 44 by March.
Credit Agricole, a unit of France’s second-largest bank, predicts the currency will appreciate 4.5 per cent in the next six months to 42.5, a level not seen since August 2008. The rupee will advance 4.5 per cent by 2011-end, trailing the 7.8 per cent gain in South Korea’s won, 4.2 per cent in yuan and 4.1 per cent in Indonesia’s rupiah, Bloomberg News surveys show.
No Intervention
While emerging-market nations from Brazil to Russia complain about the strength of their currencies, Indian central bank Governor Duvvuri Subbarao told a forum on Oct. 9 in Washington that he hasn’t needed to curb the rupee’s advance.
“If the inflows are lumpy and volatile or if they disrupt the macroeconomic situation, we will do so,” Subbarao said. “We’ve not found the need to intervene so far.”
Banks predict a deteriorating trade balance will help slow gains in the currency, with the median forecast in the Bloomberg survey showing the rupee will drop to 45.13 by the end of the year. India’s current-account deficit widened to a record $13.7 billion in the three months through June, the Reserve Bank of India said Sept. 30.
“The reason we didn’t feel the need to intervene is because our absorption, driven by a widening current-account deficit as imports have surged on the back of a positive outlook on growth and investment, has also increased,” Subbarao said.
Prime Minister Manmohan Singh’s government plans to sell shares in as many as 68 companies as part of efforts to shrink the budget deficit to 5.5 percent of gross domestic product in the year ending March 31 from an estimated 6.9 percent last year. He is seeking to raise 400 billion rupees from asset sales by March 31 to also help fund construction of roads, ports, hospitals and schools.
“The Coal India share sale will bring in a few more billion dollars,” Singapore-based Samir Arora, founder of hedge fund Helios Capital Management Pte. said in an Oct. 8 interview. “It may create a lot of volatility in the currency.”
