India's interest rate carnage

The past three weeks have witnessed a seismic shift in the direction of Indian interest rates. This spells doom for the local corporate debt market.

India's corporate bond market hasn'táhad a shot in the arm recently; it's had a shot in the head.

The debt market û one of the most vibrant in Asia and the third largest afteráJapan and Korea û has been wounded by rising interest rates in the past three weeks. With poor inflation numbers and a sharp rise in US rates, the direction of interest rates has suddenly gone skywards.

In recent months, the 10-year benchmark government bond has fallen dramatically, to as low as 10.26%. A total borrowing programme for the year of Rs1.1 trillion ($24.6 billion)álooked good for the government. However, in the past three weeks, the 10-year yield has soared from 10.26% to 11.15% û an unprecedented rise in terms of speed. This is largely because the last two treasury auctions were undersubscribed to the tune of 72%, and accordingly the Reserve Bank of India had to step in and buy up the bonds.

According to the head of one international bank: "The era of declining interest rates is over. People don't quite know where this is going."

One thing is certain: many corporates have now put their issuance plans on hold till they see how the situation stabilizes. Meanwhile, one major foreign firm is rumoured to have lost all the money it made in the first quarter in the carnage of the last three weeks as bond prices have plummeted.

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