India swap market price in fastest rate increase

Mumbai: India's swap market is pricing in the fastest pace of interest-rate increases among Brics (Brazil, Russia, India, China and South Africa) nations as Standard Chartered Plc and Barclays Plc raise estimates for the amount of monetary tightening needed to damp inflation.

The fixed rate to receive floating payments for one year has climbed 40 basis points this month to 7.81 per cent, the highest level since October 2008. The 1 percentage point spread between the swap and benchmark lending rate compares with 43 basis points in Brazil, 23 in China and 38 in South Africa. The difference in Russia was minus 322 basis points.

Wholesale prices rose 8.98 per cent in March, according to official data released last week, overshooting the Reserve Bank of India's target of 8 per cent. Standard Chartered forecast on April 18 the repurchase rate will rise by 1 percentage point in six months, while Barclays predicted a 75-basis point increase, compared with original calls of 50 basis points.

"The RBI won't get any respite from inflation because of higher energy prices," Kumar Rachapudi, a Singapore-based interest-rate strategist at Barclays, said yesterday.

"The surge in swap rates indicates market expectations have increased for more rate hikes."

Rate hikes

The Reserve Bank has increased its benchmark repurchase rate eight times since mid-March 2010 to 6.75 per cent. The one- year swap rate may rise as high as 7.85 per cent before the next monetary policy review on May 3, Rachapudi said.

The one-year swap rate rose three basis points to 7.81 per cent on Friday, according to data compiled by Bloomberg.

India's inflation rate is the highest among the Brics nations after Russia. Consumer prices in China rose 5.4 per cent last month, 9.5 per cent in Russia, 6.3 per cent in Brazil and 4.1 per cent in South Africa.

The yield on the 8.08 per cent note due August 2022, the most-traded Indian government bond, rose one basis point to 8.27 per cent on Friday, bringing this month's increase to 19 basis points, or 0.19 percentage point. The bond traded at 8.25 per cent in Mumbai. Rachapudi said he expects the yield to reach 8.4 per cent by the end of June.

Losing out

India's bonds have lost 0.9 per cent this month, the worst performance among 10 Asian local-currency debt market outside Japan, according to indexes compiled by HSBC Holdings Plc.

The difference in yields between India's government debt and US Treasuries due in a decade has widened to 468 basis points from a 10-month low of 437 reached April 8.

Last month's jump in India's inflation rate was driven by a surge in the cost of factory goods.