Weak Indian economy halting jump in company bond yields

Weak Indian economy seen halting jump in company bond yields

Representative image.

India’s corporate borrowers, hit by a slowing economy and a recent uptick in borrowing costs, can likely expect a helping hand from the central bank.

A jump this week in Indian corporate bond yields due to surprisingly high inflation data is unlikely to persist as weak economic growth puts pressure on the Reserve Bank of India to ease, according to market participants. The RBI will probably cut rates as early as June, as a food-supply shock that pushed up prices reverses, according to Bloomberg Economist Abhishek Gupta.

India's economy is grappling with the slowest expansion in more than a decade, and Prime Minister Narendra Modi’s efforts to revive growth are being complicated by a crisis at the nation’s shadow banking sector. Volatile crude oil prices amid US-Iran tensions have added to inflation pressure in India, the world’s third-biggest oil importer.

The yield on five-year rupee-denominated corporate bonds rose to the highest in a month Tuesday after consumer price inflation in India unexpectedly jumped to 7.35%, a more than five-year high. Rates on five-year notes fell back on Wednesday.

The prolonged crisis at non-bank finance companies is a bigger concern for credit markets than inflation, and the RBI will likely continue to undertake market operations that target yields, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co.

Rising consumer prices will likely limit RBI easing options, but many believe the broader economic problems leave the central bank with little choice but to continue loosening policy.

“RBI may delay cutting interest rates, but is unlikely that it will change its accommodative stance as it needs to support growth,” said Sandeep Agarwal, manager of fixed-income at Sundaram Asset Management Co. in Mumbai.

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