Informist, Friday, Jun 30, 2023
By Subhana Shaikh
MUMBAI – External commercial borrowings and dollar bond issuances by Indian companies are likely to remain muted in the near term with interest rate hikes by major central banks making these fundraising options expensive, industry players said.
External commercial borrowings by Indian corporations plummeted to $25.05 bln in 2022-23 (Apr-Mar), down 50% from $50.07 bln the preceding year, according to data from the Reserve Bank of India.
While this was largely on account of the global interest rate hike cycle, market participants expect dollar-denominated borrowings by domestic companies to remain subdued in 2023-24 as well, following rate hikes by the Bank of England and the European Central Bank, and the hawkish tone of the US Federal Reserve.
On Jun 15, the ECB raised its key policy rates by 25 basis points to 4.00% and indicated that it would continue to push them higher.
Last week, the BoE increased its policy rate by 50 bps to 5.00%, against expectation of an increase of 25 bps, in an attempt to moderate inflation. While the US Federal Reserve kept its rates unchanged earlier this month, it has hinted at more rate hikes in 2023.
According to a median of projections by US Federal Reserve officials, the policy rate is seen at 5.50-5.75% at the end of 2023, 50 bps higher from the previous projection in March.
"I don't see any sense in borrowing in dollars without a natural hedge and running the FX risk when the hedge cost and volatility are high," said Shameek Ray, head of debt capital markets, ICICI Securities Primary Dealership.
"Small amounts you can always do to keep your franchise, but barring that, it's easier and cheaper to do rupee borrowing."
While the Indian rupee has been steady between 81.80 and 82.85 to the US dollar so far in the current financial year, it had depreciated 7.8% against the greenback in 2022-23, according to data compiled by Informist.
Interestingly, in 2022-23, Indian corporations raised less than the overseas debt that was maturing that year. Companies raised $25.05 bln through external commercial borrowings, while the debt maturity amount was $31.4 bln.
Usually, companies borrow to refinance existing overseas debt. In 2021-22, companies borrowed $50.07 bln while debt worth $28.79 bln matured that year.
"Definitely overseas borrowings will remain subdued," said Anil Gupta, vice-president, financial sector ratings, at ICRA. "At this point in time, diversification can be one reason, refinancing of dollar liability could be the other because they have dollar revenues and for them, it is a hedge."
In the current financial year, REC, State Bank of India and ReNew Power have tapped the offshore market for their fundraising needs.
"FX borrowing could be on and off for some," a senior treasury official at a foreign bank said. "If the opportunity is correct, people will tap the overseas market, but right now there is no strong pipeline at least."
The official said the current low interest differentials don't work for borrowers. "Earlier, corporates would tap the external commercial market because the dollar cost of funds was much lower," the official said. Now, however, the differential is so low, and is likely to remain so for a while, that most corporate borrowings are rupee-denominated.
The differential between the US and India policy rates has narrowed to 1.25-1.50% in June from 3.15-3.40% in the year-ago period.
On Thursday, the yield on the 10-year benchmark US Treasury note ended at 3.85% while the Indian 10-year benchmark 7.26 33 government bond was trading at 7.11% yield today. As of Jun 30, 2022, the yield on the 10-year US Treasury note was at 2.98%, against 7.45% on the Indian 10-year benchmark 6.54 32 government bond. A rise in US Treasury yields narrows the interest rate differential between the safe-haven government bonds and emerging market debt.
"Clearly, the funding cost has gone up, with short-term rates now at 5.25% and likely to go up to 5.50-5.75% or even higher in the US," said Dhawal Dalal, chief investment officer, Edelweiss Asset Management. "It's costly for people to raise money abroad. On hedge-adjustive basis, it's cheaper to raise money in India now."
Borrowings through the domestic bond market remain robust owing to the large credit offtake and the view that the Reserve Bank of India's Monetary Policy Committee is likely to keep interest rates unchanged at least till the end of 2023.
So far in the current financial year, Indian corporations have borrowed 3.03 trln rupees through 785 corporate bonds on a private placement basis compared with 1.20 trln rupees through 480 bond offerings in Apr-Jun of 2022-23, according to data from the National Securities Depository, compiled by Informist.
For a change, it looks like Indian companies are flocking to the domestic debt market and giving the overseas markets a miss. End
Informist Media Tel +91 (22) 6985-4000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2023. All rights reserved