Surging Onion, Lentil Prices Push Swap Gap to
Two-Year High: India Credit
India’s
one-year interest-rate swap climbed to the highest relative to the benchmark
lending rate since July 2008, as rising prices of onions and lentils increased
concern policy makers may lose control over inflation.
The
spread between the swap rate, the fixed cost to receive floating payments, and
the Reserve Bank of India’s repurchase rate widened to 89 basis points from 57
on Nov. 30. The spread was at 73 basis points, or 0.73 percentage point, on
Nov. 1, the day before the central bank last raised borrowing costs.
The
price of onions, a key ingredient in the country’s curries and snack foods,
soared 40 percent in the week ended Dec. 18 from a year ago and the finance
ministry said the jump drove food inflation to a 10-week high. India’s one-year
swaps climbed 208 basis points in 2010 to 7.14 percent, compared with a 113
basis point increase in China, a 161 basis point advance in Brazil and a drop
of 205 in Russia.
India’s
central bank lifted the repurchase rate by 150 basis points last year, the most
of any monetary authority in Asia. The repurchase rate, at which lenders borrow
from the central bank, may be raised 25 basis points to 6.5 percent at the next
review Jan. 25, the highest level since December 2008.
An index measuring wholesale prices
of agriculture products including lentils, rice and vegetables jumped 14.44
percent in the week ended Dec. 18, a two-month high, government figures showed
on Dec. 30. Food makes up about 14 percent of the wholesale price index that
India uses as its inflation barometer.
India
placed an indefinite ban on exports of onions last month. The country
eliminated import duties for the vegetable and ordered state-owned trading
companies to ship supplies from overseas, Trade Secretary Rahul
Khullar told reporters in New Delhi Dec. 22.
“The
fluctuation in milk, fruit, vegetables and certain commodities have contributed
to inflation,” Finance Minister Pranab Mukherjee said in New Delhi Dec. 30, when he raised his
target for wholesale-price inflation to about 6.5 percent by March 31, from 6
percent. India’s central bank said in a Dec. 30 report that inflation is at
“elevated levels.”
India’s central bank needs to keep a
balance between curbing price increases and making sure the economy has enough
money to grow. The Reserve Bank pumped almost 414 billion rupees ($9.2 billion)
into the financial system in December by buying sovereign bonds to help ease
the worst cash crunch in 10 years.
Reserve
Bank of India Governor Duvvuri Subbarao
said Dec. 9 he’s “deeply conscious” of the cash shortfall, which was aggravated
as companies raised a record 1.16 trillion rupees last year by selling shares.
The
Reserve Bank of India bought back 115.02 billion rupees of government notes
Dec. 29. Banks borrowed an average 918 billion rupees last quarter using the
repurchase auction window, compared with 239 billion rupees in the previous
three months.
The nation’s 10-year bonds rose last
week after the central bank repurchased debt to ease the cash crunch in the
banking system. The yield on the 7.8 percent bond due in May 2020 fell four
basis points to 7.91 percent, according to the central bank’s trading system.
The 10-year bond yield rose 32 basis points in 2010 as the central bank boosted
interest rates six times to damp inflation. Indian sovereign bonds returned
investors 5.2 percent in 2010, compared with 21 percent in Indonesia, HSBC
Holdings Plc indexes show.
The
cost of protecting debt of State Bank of India from default for five years rose
42 basis points to 160 in 2010, and is down from a high of 239 basis points in
May after the credit outlook improved in the second half. Some investors use
State Bank as a proxy for sovereign credit-default swaps.
India’s
rupee rose 4.1 percent in 2010 after gaining 4.9 percent in 2009, and slumping
19 percent in 2008. The currency appreciated 0.6 percent to 44.71 per dollar on
Dec. 31.
Global money managers poured a
record $29.3 billion into Indian equities last year, according to data from the
Securities & Exchange Board of India. They invested $22 billion in Japan
and $20 billion in South Korea. Fund inflows are poised to increase as economic
growth and slowing inflation boost returns from local assets, according to
Mumbai-based Yes Bank Ltd.