Iran oil curbs to hold rupee back: Experts

The Reserve Bank of India’s (RBI’s ) move to block dollar or euro payments for Iranian oil threatens to swell a record current-account deficit, damping investor confidence in the rupee and government debt.

On December 27, RBI had said trade transactions with Iran must be settled outside the Asian Clearing Union, a regional payment arrangement that had allowed companies to skirt US and European limits on doing business with the West Asian nation. Sourcing the fuel from elsewhere “may impact prices,” Indian Oil Chairman B M Bansal said last week.

Nomura Holdings forecasts bond yields would climb. Mumbai-based Kotak Mahindra Bank estimates the rupee to fall as much as 4.8 per cent this year as the Iran supply disruptions aggravate the cost of rising commodity prices on India’s finances.

The 10-year bond yield has risen 41 basis points (bps) to 7.96 per cent since July as crude-oil prices traded in New York climbed 21 per cent in the second half of 2010 to $91.38 a barrel.

“In three to six months, the current-account deficit is going to get worse, partly accentuated by the Iranian oil-payment issue,” Robert Prior-Wandesforde, the Singapore-based head of India and Southeast Asia economics at Credit Suisse Group AG, said yesterday. “The rupee is getting more vulnerable and bond yields may rise a little.”
 

MONEY WOES Currency per dollar
	Dec 31, ’09	Dec 31, ’10	% chg
Japanese yen	93.02	81.12	12.79
Malaysian ringgit	3.43	3.06	10.59
Thai baht	33.37	30.06	9.92
Singapore dollar	1.40	1.28	8.65
Taiwan dollar	31.99	29.30	8.40
Indonesian rupiah	9404.00	8996.00	4.34
Rupee	46.53	44.71	3.91
Korean won	1164.00	1126.00	3.26
Chinese yuan	6.83	6.61	3.22
Hong Kong dollar	7.75	7.77	-0.24
Russian ruble	30.04	30.54	-1.67
Source: Bloomberg                    Compiled by BS Research Bureau

Rupee forecasts
Credit Suisse predicts shortfall in the current account, which widened to $15.8 billion in the September quarter from $12.1 billion in the second quarter, may swell to as much as $17 billion by June. India’s foreign exchange reserves were $265.9 billion as of December 24, compared to China’s $2.648 trillion as of September 30.

The rupee will return 3.4 per cent in 2011, compared to 5.3 per cent for China’s yuan, 0.5 per cent for Russia’s ruble and a negative 2.4 per cent for Brazil’s real, according to economists surveyed by Bloomberg.

Elsewhere in India’s credit markets, government bonds fell, Indian Overseas Bank began an offering of bonds and IDBI Bank plans to use debt as soon as this week.

Yields on India’s 10-year benchmark bonds increased five bps to 7.96 per cent yesterday. The yield is 461 bps more than similar-maturity US treasuries, up from 375 at the end of 2009. The rate is 46 bps more than Indonesia’s 7.5 per cent, Asia’s second-highest yields.

Yield forecasts
India’s government bonds returned 5.2 per cent last year, according to indexes compiled by HSBC Holdings. The notes underperformed securities in Indonesia, which returned 21.1 per cent, the most in Asia. The 7.8 per cent security due May 2020 will yield 8.05 per cent by the end of this year, according to the median forecast of six economists in a Bloomberg survey.

“Over the next couple of weeks, bond yields may rise to as much as 8.1 per cent,” said Vivek Rajpal, an interest-rate strategist at Nomura in Mumbai. “If commodity prices rise sharply, the yield may increase to 8.2 per cent.”

Indian Overseas Bank, a state-run lender, began the sale of Rs 925 crore of 15-year subordinated bonds yesterday, according to two people familiar with the matter. The so-called upper-tier 2 notes pay a coupon of nine per cent, the people said, asking not to be identified as the information was private. The bonds had an option, allowing the company to buy the debt back at the end of the 10th year, the people said.

IDBI plans sale
IDBI Bank plans to sell Rs 1,000 crore of 10-year bonds tomorrow, according to two people familiar with the matter. The bonds pay a coupon of 9.04 per cent, the people said, asking not to be identified as the information was private. In June, the United Nations stepped up punitive measures against Iran over its nuclear ambitions, applying a fourth round of sanctions. European Union and the US later imposed additional restrictions. Iran says it is enriching uranium for power generation.

Refiners in India have traditionally used the ACU, which settles payments in dollars and euros, to pay for oil purchases from Iran. Regulations endorsed by EU in October required deals involving Iran and the euro to be accompanied by a certificate outlining payment details for each and every transaction, the EU said on its website.