Inflation Worries Trigger Record Sales of Rupee Floaters

Indian 50 rupee, left, and 2000 rupee banknotes. (Photographer: Brent Lewin/Bloomberg)

Inflation Worries Trigger Record Sales of Rupee Floaters

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Concerns about Indian inflation have prompted issuers to sell a record amount of rupee floating-rate bonds this year, a trend that may accelerate after price increases in the economy surprised investors this month.

  • Issuance of the notes has jumped 86% to 237.6 billion rupees ($3.2 billion) so far in 2021, a record for the period, even as offerings in the broader local corporate bond market as a whole have declined by about 17%. Sales of floaters in June are at their highest for any month since April
  • Floaters can help investors when inflation is picking up because the interest that the securities pay increases when benchmark rates rise
  • A higher-than-expected increase in consumer prices in May triggered a recent selloff in shorter-maturity rupee bonds on concern that the Reserve Bank of India may be prompted to withdraw market supports earlier
Inflation Worries Trigger Record Sales of Rupee Floaters
  • In a sign of increased investor interest in floaters, Tata Asset Management Ltd. opened a new rupee fund this week that will invest predominantly in the instruments
  • Thirty one issuers have sold local-currency floaters so far this year, already at the same level for all of 2020. Still the market for such issuance by volume is relatively small. Floaters accounted for 6.9% of total rupee corporate bond sales year-to-date, compared with 3.1% for the same period in 2020 and 0.6% in 2019
  • Read also: RBI’s Pivot - Here’s When, What It Will Look Like

Primary Issuance -- Fewer deals

  • Rupee bond sales by Indian companies have slowed this week after yields on three-year notes of top-rated issuers climbed to their highest since April
  • Firms have sold 51.7 billion rupees of debt securities as of Wednesday and plan to offer as much as 22.3 billion rupees in the remainder of the week. If those deals are concluded, the total would be less than half of the about 150 billion rupees raised last week

Secondary Market -- Rising Costs

  • Rupee borrowing costs have climbed higher this week on concerns that rising oil prices may fan inflation risks. The commodity, India’s biggest import item, climbed above $75 a barrel for the first time in more than two years recently, based on Brent crude futures
  • The average yield on top-rated three-year corporate notes jumped 14 basis points to 5.3% as of Wednesday, on track for a second weekly increase
Inflation Worries Trigger Record Sales of Rupee Floaters
  • In the dollar market, spreads on Shriram Transport Finance’s bonds may still tighten versus Muthoot Finance debt, Bloomberg Intelligence Analysts Rena Kwok and Sheenu Gupta wrote in a note, citing a recent capital infusion of 20 billion rupees by the parent of Shriram Transport Finance

Credit Rating -- Mixed performance

  • Reliance Industries’ foreign-currency debt rating was upgraded to BBB from BBB- on Wednesday by Fitch Ratings, a level higher than India’s sovereign ranking. Fitch cited strong external debt-servicing capabilities
  • The rating outlook for ICICI Bank, one of India’s largest private lenders, was revised to stable from negative by S&P Global on June 18. The bank will benefit from the sale of an insurance subsidiary stake and the gradual normalization of earnings, S&P said
  • Crisil downgraded state-owned Bharat Heavy Electricals to AA- from AA due to significantly weaker-than-expected operating performance in fiscal year 2021, according to a statement from the rating company on June 18
  • HPCL-Mittal Energy’s credit metrics could weaken should there be a delay in EBITDA addition from its new petrochemical plant, or a weaker gross refining margin, Fitch Ratings said on Wednesday

Distressed Debt -- Resume Operations

  • An Indian bankruptcy court ruled Jet Airways India, once India’s biggest private carrier, can resume operations under a new owner more than two years after it collapsed, Ashish Chhawchharia, the court-appointed professional running the carrier’s insolvency said Tuesday
  • Lenders of Reliance Home Finance selected Authum Investment & Infrastructure as the successful bidder for the company, the financier said on Monday
  • Read also: Banks Recover About $1 Billion From Indian Ex-Billionaire Mallya

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