Bloomberg Goldman, Right in 2010, Sees 7% RBI Rate by June: India CreditNovember 19, 2010, 4:20 AM EST
By Kartik Goyal Nov. 19 (Bloomberg) -- Tushar Poddar, the Goldman Sachs Group Inc. economist who correctly predicted how high India’s central bank would raise interest rates this year, forecasts further increases are needed to curb inflation. The Reserve Bank of India may lift the repurchase rate as much as 75 basis points in the first half of 2011 to 7 percent, according to Poddar. That’s three times the median estimate of 25 basis points in a survey of 10 economists by Bloomberg News yesterday. Only HSBC Holdings Plc. shared his forecast. Poddar estimated in January 150 basis points of increases in 2010, a call fulfilled by the bank’s Nov. 2 move. “There is a concern inflation may remain persistent despite the RBI’s rate action,” Poddar said in the interview in his office a day after the RBI’s meeting. “Ideally, both the fiscal and the monetary policy should be tighter than where they are right now to address inflation and the current-account deficit.” Asia’s fastest round of monetary policy tightening threatens to slow expansion in the $1.3 trillion economy and push up government borrowing costs. While higher rates would bolster the rupee by enhancing the premium over the near-zero borrowing costs in the U.S., a widening current-account deficit may limit gains and increase exchange-rate swings, Poddar said. Inflation, IDBI India’s annual consumer-price inflation was 9.82 percent in September, more than twice China’s and the highest among Group of 20 nations after Argentina. China, the fastest-growing major economy, raised its main one-year lending rate for the first time since 2007 last month. Brazil raised benchmark borrowing costs by 200 basis points this year, while Russia cut by 100. Elsewhere in India’s credit markets, state-owned lender IDBI Bank Ltd. obtained a $125 million dollar-denominated loan. GAIL India Ltd., the nation’s biggest natural gas distributor, plans to raise about $420 million borrowing from the U.S. Export-Import Bank and selling local-currency debt to fund projects. The nation’s government bonds gained yesterday. IDBI’s three-year loan will pay interest at 145 basis points, or 1.45 percentage points, more than the three-month London interbank offered rate, or Libor, Executive Director Melwyn Rego said in an interview yesterday. The loan was arranged by 12 banks, including BNP Paribas, Royal Bank of Scotland Group Plc and Standard Chartered Plc, he said. Government Bonds GAIL, a state-run company that recently got approval for a $100 million loan from Exim Bank, has applied for another $100 million, Finance Director R.K. Goel said in a telephone interview. The utility plans to raise 10 billion rupees ($220 million) in the year ending March 31 selling bonds, commercial paper and raising funds from other state-run companies. India’s 10-year bond yield rose one basis point to 8.03 percent as of 2:45 p.m. local time today. The bonds gained the most in more than two weeks yesterday, driving the yield on the 7.80 percent note due May 2020 down five basis points to 8.02 percent, according to the central bank’s trading system. That was the biggest decline since Nov. 2. While India’s benchmark 10-year rupee bond yield has risen 44 basis points this year, Poddar predicted it will remain at about 8 percent through March. The premium compared with similar-maturity U.S. Treasuries has advanced to 517 basis points from 375 on Jan. 1, helping to attract an unprecedented $10 billion of inflows into rupee debt this year, bringing foreigners’ holdings to $17.6 billion. Rupee Forecast Goldman forecasts the rupee will strengthen 4.1 percent to 43.40 per dollar in six months, adding to a 2.9 percent gain this year to 45.20 as of today. It may lag behind some emerging- market currencies because of India’s current-account deficit, which may be 2.9 percent of gross domestic product for the year through March, according to Goldman. The firm advised buying South Korea’s won versus the rupee. RBI Governor Duvvuri Subbarao raised the repurchase rate, used to inject money into the financial system, to 6.25 percent this year from 4.75 percent, and the reverse repurchase rate, used to withdraw funds, to 5.25 percent from 3.25 percent. With inflation slowing, and the RBI concluding in September that monetary policy had already returned “close to normal,” India’s central bank said Nov. 2 that it probably wouldn’t boost borrowing costs for at least three months. “Immediate future rate action is unlikely barring some shocks,” Subbarao said in a press conference in Mumbai Nov. 2. He said in a Nov. 3 interview that it may take one or two years to bring inflation “firmly” under control. ‘Wait and Watch’ Standard Chartered Plc predicted he will keep rates unchanged through June to safeguard growth. Prime Minister Manmohan Singh’s government wants the nation to achieve a sustained 10 percent expansion pace. The International Monetary Fund raised its 2010 economic growth forecast for India on Oct. 6 to 9.7 percent from 9.4 percent, the fastest pace among major economies after China. “The RBI will wait and watch,” said Samiran Chakraborty, a Mumbai-based economist at Standard Chartered who previously taught at the Delhi School of Economics. The cost of fixing rates on money for a year has surged a record 166 basis points this year to 6.72 percent in India’s interest-rate swaps market, data compiled by Bloomberg show. The rate, a fixed payment made to receive floating rates, increased 24 points this quarter as the Federal Reserve announced plans to pump $600 million into the U.S. economy by buying Treasuries. ‘Taking a Risk’ “The RBI is definitely taking a risk not hiking rate further,” Edwin Gutierrez, a money manager who helps invest $6 billion in emerging market-debt at Aberdeen Asset Management Plc in London, said in a Nov. 16 interview. “If stronger commodity prices do indeed feed through from the Fed’s easing, that risk will prove to be foolhardy.” India’s wholesale inflation rate will reach 6.5 percent in the year through March, a percentage point higher than the RBI’s forecast, said Poddar, who researched the monetary systems of Jordan and Lebanon while an economist at the International Monetary Fund before joining Goldman in 2006. “The pause in the interest-hiking cycle may be temporary and RBI will resume raising rate in early 2011,” said Poddar, 37. The native of Kolkata earned his doctorate in economics from the London School of Economics and his bachelor’s degree at Lawrence University in Appleton, Wisconsin. Poddar predicted in January the central bank would announce a shift in its main policy tool to the repurchase rate from the reverse repo, resulting in monetary tightening to the extent of another 150 basis points. The RBI did that in July as the banking system faced a shortage of liquidity. JPMorgan Chase & Co. underestimated in January the amount of increases, predicting 0.75 to 1 percentage point before March 2011. Nomura Holdings Inc. the same month forecast a rise of 1.25 percentage points in the repo rate by December, as did HSBC and Credit Agricole SA. Morgan Stanley correctly forecast the year-end 6.25 percent level. Deutsche Bank AG had estimated a 6 percent repurchase rate for December 2010, and now see 75 basis points of increases in 2011, taking it to 7 percent. “Making forecasts in India is very difficult and can’t be compared with advanced economies, given the inefficiencies in the data compilation, such as for inflation,” Poddar said. After his forecasting success in 2010, he said, “the stakes and challenges have increased to get the next rate call right.” -- Best Regards, Jay Shah, FRM -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
