India Inc. Faces Higher Borrowing Costs as Short-Term Yields Surge Pratigya Vajpayee Rate-hike bets and RBI’s liquidity withdrawal are driving up funding costs. Good morning... I’m Pratigya Vajpayee in Mumbai, where calls for interest-rate hikes are growing louder.
The Reserve Bank of India is widely expected to raise rates on Oct. 7. Expectations for tighter monetary policy, coupled with the central bank’s efforts to drain excess cash from the banking system, have sent short-term bond yields sharply higher. That’s pushing up borrowing costs for companies and adding another headwind for India’s beleaguered stock market, as we write below.
The benchmark Nifty 50 fell for a third straight session Wednesday and, barring a miracle today, it is set to cap its longest weekly losing streak in nearly 25 years (local markets are shut Friday). Global funds sold $3.1 billion of Indian shares last month through Sept. 29, and a quick return of overseas money looks unlikely given elevated oil prices and rising global bond yields. Asian stocks and bonds have declined in early Thursday trading while Treasuries held losses as elevated oil prices kept inflation concerns alive.
In today’s newsletter, we write about: India’s five-year bonds have just capped their worst quarter in more than four years as traders ramped up bets on rate hikes, with the RBI’s liquidity-draining bond sales — concentrated in maturities of up to six years — adding to the pressure. Shorter-dated notes have been the worst hit in the latest India bond slump given their relatively high sensitivity to changes in liquidity and near-term interest-rate expectations. The rise in borrowing costs is already starting to impact companies, with two state-run Indian firms late last month withdrawing plans to raise $688 million through rupee bonds.
NSE options trading shows signs of revival The options market is showing signs of a rebound. Premium turnover for NSE index contracts rose Tuesday to its highest since April. While that was partly boosted by heavier trading around the monthly expiry, the pickup is welcome after regulatory curbs and higher costs damped activity.
Sustained momentum during weekly expiries could also support NSE’s shares, which hit a post-listing low of 1,761 rupees Wednesday. Derivatives activity is crucial for the exchange because weekly options on the Nifty 50 still account for about 40% of its revenue, its CEO told Bloomberg TV last week. The index inclusion curse Meanwhile, rival BSE has had little to cheer about, with its stock falling as much as 4% on Wednesday even as it joined the benchmark Nifty 50.
Recent index inclusions have had a rough ride, underscoring the market view that stocks enter benchmark gauges after much of their outperformance is already behind them. That can lead to subpar returns in the months that follow. Inter Globe Aviation and Max Healthcare Institute fell about 30% and 14%, respectively, in the six months after their inclusion last September.
BSE faces other challenges too. Derivatives volumes have been falling amid regulatory curbs, while macro-driven volatility and the new closing auction could weigh on cash-market volumes as well. Hotel demand to stay strong: Motilal India’s hotel industry is continuing to see healthy demand as domestic travel remains strong, while conferences, corporate events and destination weddings are also helping fill rooms.
Revenue per available room is expected to have risen about 10% to 12% in the quarter ended September, according to Motilal Oswal, helped also by higher room rates. The brokerage is positive on the sector over the next two to three years, as demand is likely to stay ahead of new room supply, giving hotels scope to keep raising rates. Top picks: Indian Hotels, Lemon Tree, and Ventive.
The September derivatives rollover was a mixed bag, according to Axis Securities. Nifty rollover came in at about 74%, below the previous expiry and its recent averages, suggesting traders stayed cautious...
Source: Bloomberg Markets · Summarized by HeadlinesBriefing