India?s record trade deficit with China is being reflected in the financial markets, where prices signal diminishing chances the India will become the fastest-growing BRIC economy.
New York University Professor Nouriel Roubini has said India has the potential to exceed China?s growth rate if the government lifts curbs on investment and boosts spending on roads. This year, investors haven?t endorsed that view: India?s bonds and the rupee have slumped on concern the central bank has lost control of inflation. Stocks have dropped the most in the world after Egypt amid a probe into a sale of phone licenses.
?The rupee will lag the yuan this year as India must deal with the large current-account deficit,? Mitul Kotecha, the Hong Kong-based head of global currency strategy at Credit Agricole SA, said in an interview yesterday. ?There?s some nervousness about inflation, and India is more vulnerable to the volatility in global portfolio flows.?
The rupee fell 1.5%against the yuan this year, the second-worst performance among Asia?s 10 most-used currencies. Yields on two-year government notes climbed 25 basis points to 7.72 percent, while rates on comparable securities in China dropped 6 basis points to 3.34 percent, Bloomberg data show. The trade gap between the two economies more than doubled to an average $1.7 billion a month last yea.
Rupee retreats
An undervalued yuan hurts India by tilting the trade balance ?decidedly in favor of China,? Reserve Bank of India Governor Duvvuri Subbarao said on February 8 before a meeting of the Group of 20 nations that starts on Friday in Paris. The rupee has retreated almost 6% to 6.87 per yuan from last year?s high of 6.48 as India imported goods worth $40.9 billion from China in 2010, double the amount it exported to its neighbor. India?s 10-year government bond yields have climbed 23 basis points since the end of September after the current- account deficit, the broadest measure of trade, widened to a record $15.8 billion in the third quarter of 2010.
Bond Losses
Indexes compiled by Bank of America Merrill Lynch show India?s government bonds lost 0.4% in January, compared with a 0.2% decline in Chinese notes, as the Reserve Bank raised borrowing costs for a seventh time in the past year to curb price pressures. The difference in yields between India?s bonds due in a decade and similar-maturity US Treasuries has widened to 448 basis points from last year?s low of 384 as food prices in the Asian nation rose 11.05% in the week ended February 5, holding above 10% for a 10th consecutive week. The yuan will appreciate 4.4% against the dollar by the end of the year, beating a 3.2% gain in the rupee, according to the median estimates of analysts in Bloomberg News surveys. China?s currency has advanced 0.2%in 2011, while India?s has slid 1.1%, according to data compiled by Bloomberg.
?We are still generally bearish on the Indian bond market, and also they aren?t getting any help in terms of the currency anchor,? Adeline Ng, who oversees $1.6 billion of debt at BNP Paribas in Singapore, said in an interview. ?On the fixed-income front, I still prefer India because the yield is much higher there, and the RBI?s measures to contain inflation are very credible,? Rajeev De Mello, the Singapore-based head of Asian investment at Western Asset, said in an interview yesterday. ?Inflation is expected to ease this year, and the effect of the scandals on growth is going to be quite temporary.?