India’s Interest Rate Structure

CEIC India Data Talk: India’s 10-year government securities yield (its benchmark bond yield) declined to 8.036% per annum in March 2013 from 8.38% as of the end of October 2012. The decline in interest rates was observed across almost all maturities, driving modest gains in bond prices. Lower bond yields were largely attributable to lower inflation expectations, hence potentially allowing for a looser monetary policy stance in the near future owing to increasing economic uncertainties. The Reserve Bank of India (RBI) lowered the interest rate on repurchase agreements (the repo) from 7.75% to 7.50% on 19 March 2013; this was the third time the repo rate has been cut since March 2012 when it stood at 8.50%. The Professional Forecasters Survey (PFS), conducted by the RBI, predicts the repo rate will decline further to 7.00% during the 2013-2014 fiscal year ending in March 2014, according to the median of responses, especially in light of the 4.96% real Gross Domestic Product growth estimate by the Central Statistical Organisation. Despite the decline in 10-year government bond yields, they remain a fairly attractive investment-grade bond option for investors. Indian government bonds are rated BBB- by Standard & Poor’s (S&P), at the lower end of the investment grade rating, though yields remain fairly competitive relative to other emerging market counterparts including the average 5.556% yields offered on Indonesian government securities (rated BB+ by S&P). However, a relatively high public debt – Central Government Debt stood at 48.02% of nominal gross domestic product (GDP) as of the quarter ended December 2012 – remains a concern as it threatens a downgrade of India’s government bond rating to “junk” status. While it bears an investment grade rating, S&P and Fitch Ratings have threatened to downgrade India’s government bonds over the state of India’s public finances and relatively sluggish pace of pro-investment reforms. This may not bode well for India given its needs for financing, especially in developing its infrastructures. More recently, the government’s plan to cancel a bond auction for USD 120 billion rupees in government securities has helped reassure the markets, signalling an improvement in the public finances. While bond yields are expected to continue declining over the coming periods (the PFS estimates yields will fall to 7.8% during the 2013-2014 fiscal year) owing to lower inflation expectations, more visible reforms would go a long way towards further reducing yields while improving India’s rating outlook. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. By Chan Yee Lui - CEIC Analyst Back to Blog
23rd April 2013 India’s Interest Rate Structure