Banks bet on rate surge as India's inflation records sharp spike

New Delhi: Local banks in India are joining Goldman Sachs Group Inc in predicting benchmark borrowing costs will climb 1 percentage point in 2011 before a report showed inflation accelerated for the first time in three months in December.

Wholesale prices, the benchmark gauge, gained 8.40 per cent from a year earlier, faster than the 7.48 per cent rate in November, according to the median forecast of 30 economists in a Bloomberg survey before data due on January 14. Axis Bank, the nation's fourth-biggest lender by market value, raised its forecast from 75 basis points on Monday. Mumbai-based Yes Bank made the same adjustment last week.

One-year interest-rate swaps in India have climbed 29 basis points, or 0.29 percentage point, in the past month, the most among the so-called Bric economies of the largest developing nations excluding Brazil, reflecting expectations that the Reserve Bank of India will raise rates as soon as this month. Prime Minister Manmohan Singh is under pressure to curb inflation as his Congress party faces elections in nine states over the next 18 months.

"The dramatic change in the inflation trajectory prompted us to revise our call to a more hawkish one," Shubhada Rao, a Mumbai-based economist at Yes Bank, said in an interview yesterday. "Inflation is like a ubiquitous tax, and the government will be under pressure to get inflation under control as early as possible."

Food prices

Food prices surged 18.3 per cent in the week ended December 25, the most since July, according to a Commerce Ministry report issued on January 6. The annual wholesale inflation rate, which climbed as high as 11 per cent in April, fell in both October and November. Prime Minister Singh called a meeting of his senior ministers and officials today to discuss ways to gain control over rising food prices, according to government spokeswoman Neelam Kapur.

The central bank will review borrowing costs next on January 25 after raising the benchmark repurchase rate six times last year.

Any increase in food costs "feeds into the rest of the sectors in the economy", Chakravarthy Rangarajan, the prime minister's top economic adviser, said in an interview on January 7. If prices remain "sticky, probably some action will be required," said Rangarajan, who led the Reserve Bank between 1992 and 1997.

Tushar Poddar, a Mumbai-based economist at Goldman Sachs who correctly predicted that the central bank would raise the benchmark repurchase rate by 150 basis points in 2010, said in an interview yesterday that the biggest risk to inflation is higher food and commodity prices. Poddar told reporters in Mumbai on December 8 that he expects the central bank to lift interest rates 100 basis points in 2011.

The yield on India's 10-year bonds has risen 29 basis points this year. The rate on the most-traded 7.8 percent security due in May 2020 fell two basis points to 8.20 per cent today.

Swap rates

"With inflationary pressures persisting, we expect yields to remain elevated for a prolonged period," Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai, said in an interview yesterday. She predicts the 10-year rate will rise to 8.50 per cent by the end of the current financial year in March.

The difference between India's 10-year bonds and US Treasuries widened to 494 basis points today from 463 at the end of last year.

India's one-year swap rate, the fixed cost needed to receive a floating interest rate, climbed to 7.27 per cent from 6.96 per cent on December 10. Comparable rates in Brazil have gained 37 basis points to 12.28 per cent, those in Russia have climbed 14 basis points to 5.29 per cent and those in China have increased 11 basis points to 3.2 per cent.

India's government bonds have lost 0.3 per cent so far this month, Asia's worst performance after South Korea, the Philippines and Singapore, according to indexes compiled by HSBC Holdings Plc.

The rupee has slid 1.5 per cent in January, the third-worst performance among Asia's 10 most-traded currencies excluding the yen, on concern costlier oil prices will push up the import bill in an economy that buys about 75 per cent of its fuel overseas. Crude-oil prices in New York, which reached a two-year high of $91.55 (Dh336.72) a barrel on January 3, traded at $88.72 on Monday.

"There's a risk of inflation becoming generalised due to the spill-over effect of higher oil and food prices," Jay Shankar, an economist at Mumbai-based Religare Capital Markets, said in an interview on Monday. "If crude-oil prices go beyond $120 a barrel, it isn't unlikely that the RBI may raise rates by as much as 175 basis points." He expects the repurchase rate to climb 100 basis points to 7.25 per cent by the end of the year.

The rupee rose 0.17 per cent to 45.37 per dollar yesterday, according to data compiled by Bloomberg. The currency will trade at 46 by the end of March and weaken to 47 by the end of the year, said Poddar, who was an economist at the International Monetary Fund before joining Goldman.