Informist, Thursday, Apr 25, 2024

By Asmita Patil and Sunil Raghu

MUMBAI – Indian companies have listed $3.74 bln worth of foreign currency denominated bonds on the international exchanges in Gandhinagar in the first three months of this year, more than three times the $1.15 bln worth of such listings in Jan-Mar 2023. However, the rise is likely to be short-lived, as expectations of an interest rate cut in the US recede further and further, dampening the appetite for such bonds, market participants said.

These bonds have been listed on exchanges in the International Financial Service Centre in Gandhinagar, part of the Gujarat International Finance Tech City, according to data from the website of International Financial Service Centre Authority. Since 2018, a total of $56.5 bln of bonds issued by Indian companies have been listed on exchanges in GIFT City till Mar 31, as per data available on IFSCA's website.

As many as 28 banks have started operations in GIFT International Financial Services Centre, of which 12 are foreign banks. "Banking assets (in GIFT City) have grown to $60 bln, of which a large chunk is trade finance and external commercial borrowings taken by corporates in India," IFSCA Chairman Kalyanaraman Rajaraman told Informist. IFSCA is the regulatory body for GIFT-IFSC.

The response to some of the recent issues shows a sharp rise in overseas appetite for Indian corporate debt. In January, Shriram Finance raised $750 mln through 'BB' rated social bonds maturing on Apr 22, 2027 at a coupon of 6.625%. The company had given initial guidance of 7% for the coupon on these bonds. In January, the three-year forward premium was around 6.8%; this would take the all-in cost of this bond to 13.42%.

"Recently concluded dollar bonds are around 50 bps costlier than domestic borrowing. However, the benefit of duration and quantum raised are other factors behind this transaction," Parag Sharma, joint managing director and chief financial officer of Shriram Finance, had said in February. In December, Shriram Finance had raised 1 bln rupees through bonds maturing on May 18, 2027, at a coupon of 9.23%.

Non-banking financial companies have been facing difficulties raising funds through the domestic bond market ever since the Reserve Bank of India increased risk weights on consumer credit, including personal loans, to 125% from 100%. Knocking on the doors of banks for loans is also not an option for shadow lenders as the RBI has also increased the risk weight on credit exposure of banks to non-banking finance companies by 25%, over and above the risk weight associated with the rating of such non-bank lenders.

"Over the last few years, particularly mutual funds have reduced their overall exposure to NBFCs," a debt fund manager with a mid-sized mutual fund house said. "Till some time back, cost of borrowing was much higher in foreign markets, but over the last few months that scenario has changed...these (companies) are frequent issuers of offshore bonds."

Other low-rated issuers such as IRB Infrastructure Developers, Adani Green Energy, and Indiabulls Housing Finance also cashed in on the opportunity and raised funds through offshore bonds. Among banks, HDFC Bank and State Bank of India have raised funds through offshore bonds. Muthoot Finance, REC, Canara Bank, and Bank of Baroda are expected to follow suit.

Dollar-dominated bonds worth $17.29 bln are due to mature in 2024, according to data from global financial data provider Cbonds. Among major issuers whose bonds will mature this year are Bharati Airtel, Tata Steel, and Indian Oil Corp with bonds worth $2.9 bln maturing this year.

If the $17.29 bln of bonds maturing this year are refinanced completely through offshore bonds, it would constitute the highest issuance since 2021, when $20.26 bln worth of dollar-denominated bonds were issued by Indian companies. The highest issuance since 2006 was in 2019, when $22.5 bln worth of bonds were issued, according to Cbonds data. This data may not tally with the listings of bonds on IFSCA exchanges as the data excludes issuances of bonds in other foreign currencies except dollars.

Global investors are chasing Indian corporate bonds as everyone wants a bite of India's growth pie, market participants said. "Investors are optimistic about the fundamentals of the Indian economy and major borrowers which tap the overseas markets," said Maksim Zenkov head of India fixed income at Cbonds. "Indian companies' bonds are stable enough to invest in, and they also offer high yields."

Expected growth in GDP, falling inflation, and impending inclusion of Indian government bonds in JP Morgan and Bloomberg indices bode well for the government bond market and, consequently, for the corporate bond market, market participants said. However, issuers may have to walk a tightrope while timing their offshore bond issuances, as expectations of a rate cut in the US seem to fizzle out.

The earlier consensus that the US Federal Open Market Committee would cut rates by June has consistently been pushed back, so much so that only 65% of traders expect a rate cut even by September. Around 15% of Fed funds rate traders expect that the US may skip cutting interest rates in 2024 altogether. If these projections come true, the appetite for emerging market foreign currency bonds, including those from India, will be low.

Some issuers have already deferred plans to tap the offshore debt market. If rate cuts are pushed back substantially, Indian issuers will have to take some tough decisions. End

US$1 = 83.32 rupees

Edited by Avishek Dutta

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