Indian Firms Step Up Global Borrowings As Conditions Turn Favourable

Lower interest rates across global markets and a decline in the cost of hedging foreign currency risk has made overseas borrowings, particularly through dollar bonds, more attractive for Indian firms. After a lull in such borrowings, Indian issuers ranging from banks and financial services firms to manufacturing companies have returned to the overseas debt markets to raise funds.

On Tuesday, IndusInd Bank Ltd. concluded its first dollar denominated bond, raising $400 million, it said in a statement. The issue follows on the heels of a maiden dollar bond issued by Shriram Transport Finance Company Ltd., which also raised $400 million in February. Other firms which have recently secured or updated their international credit ratings in preparation for possible dollar bond issues include Bajaj Finance Ltd., JSW Steel Ltd., Vedanta Resources Ltd. and Indian Oil Corporation Ltd.

Factors which are driving the pick-up in dollar borrowings include a fall in bond yields in the U.S., which brings down the cost of funds raised via overseas bonds. Indian corporate bond issues are priced in relation to U.S. treasury yields, leading to a decline in borrowing costs when global yields fall.

Limited fresh supply of Indian corporate bonds in the dollar debt market in 2018 has also meant that foreign investors are eager to participate.

“Globally, because of a slowdown in the US and China, Brexit and trade-wars, debt issuances were light throughout 2018 so the cash balances of investors grew substantially. They were caught under-invested at the beginning of 2019 and so interest in dollar bonds of Indian companies has revived with emerging market issuance leading the way,” said Shantanu Sahai, head of debt finance and debt capital markets at Nomura in India.

In FY19, Indian corporates issued around $10.9 billion worth of dollar bonds in overseas markets, compared to $14.14 billion in the previous year, data from Bloomberg shows. The average coupon rate on these bonds increased to 4.25 percent in FY19 from 3.79 percent in FY18.

Lower Cost Of Hedging

All dollar borrowings have an inherent exchange rate risk attached, unless the firms earn in dollar as well. If they don’t, hedging costs play an important role in determining the final cost of borrowing overseas.

Hedging costs, in turn, are determined by the outlook for the local currency. The rupee has strengthened against the dollar in the past four months, which reduced the cost of hedging exchange rate risks, said an investment banker who spoke on the condition of anonymity.

More recently, the Reserve Bank of India’s decision to use long-term forex swaps to infuse liquidity into the domestic markets has also had a collateral benefit in the form of lower hedging costs. Since the RBI has announced a second such forex swap at the end of April, hedging costs are likely to remain in check.

For a three-year dollar borrowing, hedging costs have fallen to about 6.5 percent as of date from a peak of 7.5 percent in October 2018. Similarly, for five-year dollar borrowings, hedging costs have come down by over 100 basis point to about 6.03 percent as of date from 7.5 percent in October 2018, data from Bloomberg shows.

Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership said that corporates are comparing the cost of raising funds abroad and in India. At this stage, they are finding that the former is cheaper, he explained.

Pushing External Commercial Borrowings

Beyond short-term factors driven by market conditions, the RBI has also recently eased the external commercial borrowing policy.

The rules widened both the pool of eligible borrowers and eligible lenders and created two broad categories of foreign currency debt and rupee debt raised overseas. In December 2018, the RBI also disclosed a prudential limit for foreign borrowings and said that it would limit external borrowings to an an aggregate level to 6.5 percent of GDP.

The new framework partially replaced a myriad set of rules applicable to different industries and put in a place a comprehensive framework.

Upadhyay said that despite many steps, the RBI was not able to ease the flow of external borrowings over the last few years. But recent regulatory changes and the stability in the currency markets has been helpful in encouraging external borrowings, he said.

RBI data on approvals for external borrowings shows that Indian firms sought to raise $28.9 billion in FY19 as against $26 billion in FY18. The approvals don’t always match the final borrowings concluded.