India Plays Ball with US on Iran – Blocks
Credit in ACU – Rupee Falls
The Indian central bank’s move to
block dollar or euro payments for Iranian oil threatens to swell a record
current-account deficit, damping investor confidence in the rupee and
government debt.
The
Reserve Bank of India said on Dec. 27 that trade transactions with Iran must be
settled outside the Asian Clearing Union, a regional payment arrangement that
had allowed companies to skirt U.S. and European limits on doing business with
the Middle Eastern nation. Sourcing the fuel from elsewhere “may impact
prices,” B.M. Bansal, chairman of Indian Oil Corp.,
the nation’s biggest refiner, said last week.
Nomura
Holdings Inc. forecasts bond yields will climb and Mumbai-based Kotak Mahindra Bank Ltd. estimates the rupee is likely to
fall as much as 4.8 percent this year as the Iran supply disruptions aggravate
the cost of rising commodity prices on India’s finances. India’s 10-year bond
yield has risen 41 basis points to 7.96 percent since July as crude-oil prices
traded in New York climbed 21 percent in the second half of 2010 to $91.38 a
barrel.
Credit Suisse predicts the shortfall
in the current account, which widened to $15.8 billion in the three months
ended September from $12.1 billion in the second quarter, may swell to as much
as $17 billion by June. India’s foreign exchange reserves were $265.9 billion
as of Dec. 24, compared with China’s $2.648 trillion as of Sept. 30.
The
rupee will return 3.4 percent in 2011, compared with 5.3 percent for China’s yuan, 0.5 percent for Russia’s ruble and a negative 2.4
percent for Brazil’s real.
Elsewhere
in India’s credit markets, government bonds fell, Indian Overseas Bank began an
offering of bonds and IDBI Bank Ltd. Plans to use debt as soon as this week.
Yields
on India’s 10-year benchmark bonds increased five basis points to 7.96 percent
yesterday. The yield is 461 basis points more than similar-maturity U.S.
Treasuries, up from 375 at the end of 2009, data compiled by Bloomberg show.
The rate is 46 basis points more than Indonesia’s 7.5 percent, Asia’s
second-highest yields.
India’s government bonds returned
5.2 percent last year, according to indexes compiled by HSBC Holdings Plc. The
notes underperformed securities in Indonesia, which returned 21.1 percent, the
most in Asia. The 7.8 percent security due May 2020 will yield 8.05 percent by
the end of this year, according to the median forecast of six economists in a
Bloomberg survey.
“Over
the next couple of weeks, bond yields may rise to as much as 8.1 percent,” Vivek Rajpal, an interest-rate
strategist at Nomura in Mumbai, said in an interview yesterday. “If commodity
prices rise sharply, the yield may increase to 8.2 percent.”
Indian
Overseas Bank, a state-run lender, began the sale of 9.25 billion rupees ($207
million) of 15-year subordinated bonds yesterday, according to two people
familiar with the matter. The so-called upper Tier 2 notes pay a coupon of 9
percent, the people said, asking not to be identified as the information is
private. The bonds have an option allowing the company to buy the debt back at
the end of the 10th year, the people said.
IDBI Bank Ltd., the Indian
state-owned lender, plans to sell 10 billion rupees of 10-year bonds as soon as
tomorrow, according to two people familiar with the matter. The bonds pay a
coupon of 9.04 percent, the people said, asking not to be identified as the
information is private.
The
United Nations stepped up punitive measures in June against Iran over its
nuclear ambitions, applying a fourth round of sanctions, and the U.S. and
European Union later imposed additional restrictions. Iran says it is enriching
uranium for power generation.
Refiners
in India have traditionally used the ACU, which settles payments in dollars and
euros, to pay for oil purchases from Iran.
Regulations endorsed by the EU in October required deals involving Iran and the
euro to be accompanied by a certificate outlining payment details for each and
every transaction, the EU said on its website.
Under the ACU mechanism, payments
for all trade deals between member countries are settled every two months, with
individual transactions not accounted for separately.
“If
companies are forced to buy crude at higher prices, that may fuel inflation
fears,” Philippe Petit, a senior investment manager in Singapore at Pictet Asset Manage-ment SA,
which manages $17 billion of emerging-market debt including Indian government
and corporate bonds, said in an interview on 2 Jan. “It all depends on how long
they take to sort out the payment issue.”
India
buys about 21 million metric tons from Iran every year, or about 14 percent of
total crude-oil imports, Oil Secretary S. Sundareshan
said on Dec. 30. The Middle Eastern nation is India’s second-biggest oil
supplier, after Saudi Arabia, Oil Minister Murli Deora said in parliament on April 15.
The rupee, which gained 4.1 percent
last year, was unchanged at 44.7150 per dollar on 2 January.
“In 2011 we are talking about a depreciation
of the rupee rather than an appreciation as the wide current-account deficit
will continue to be in focus,” Indranil Pan, chief
economist at Kotak Mahindra Bank in Mumbai, said in
an interview on 2 January. He forecasts the currency, whose movements will be
“extremely volatile,” could slide to as much as 47 per dollar.
The
cost of protecting the debt of govern-ment-owned
State Bank of India, which some investors perceive as a proxy for the nation,
was 160 basis points on Dec. 31. Prices for the credit- default swaps, which
pay the buyer face value in exchange for the underlying securities or the cash
equivalent should a government or company fail to adhere to its debt
agreements, climbed 42 basis points last year. A basis point equals $1,000 annually
on a contract protecting $10 million of debt.
Bonds
of Indian Oil, which imports about 3 million metric tons of crude a year from
Iran, fell for a third consecutive month in December. The yield on the 4.75
percent notes due January 2015 climbed 24 basis points to 3.91 percent last
month.