Contracting spreads and confidence in India have driven up foreign currency bond issuances by local borrowers to nearly $21 billion in 2019 so far, a record high. The last time borrowings were as high was in 2014 when they were about $18 billion.
Foreign investors are buying more Indian paper this year partly because supply last year was limited, creating pent-up demand. Among other factors for the warm reception that Indian credit has received in 2019, Jujhar Singh, global head – high yield & head – financial markets, India, at Standard Chartered, lists a conducive offshore market, strong investor confidence and benign global rates environment. "We did see investors' willingness to buy across structures, sector and credit across tenors. This further demonstrates India becoming an increasingly important investment destination for global fixed income investors," he said.
Back home, contracting spreads and easier ECB rules are prompting Indian borrowers to tap the overseas markets. "We have seen credit spreads for high grade Indian instruments tighten approximately 40 bps since January 2019. If one considers the impact of both benchmark and credit spread compression we have seen overall yield tighten in excess of 1% during the year," Singh said.
Chiranjeev Kumar, director – loans and bonds at Citi India – points out, borrowing costs for Indian dollar bond issuers have come down. "RBI has reduced the minimum tenor to three years, lowered hedging requirements, allowed borrowings to refinance rupee debt, among others. Global rates have also come down significantly, reducing borrowing costs for issuers," Kumar said.
Bloomberg data show banks are the major issuers of FCY bonds this year having cumulatively raised more than $3.5 billion so far. Issuers include Exim Bank of India, SBI, Bank of Baroda, IndusInd Bank and Canara Bank. Other borrowers include the Adani Group and PFC that have each raised over $1.7 billion. Shriram Transport, Muthoot Finance and IndusInd Bank made their debut on the dollar bond market.
PFC's 10-year bond was priced at a spread of 240 bps over the treasury yield in 2019 while a similar tenor bond was priced at 310 bps over the treasury in 2018.
"SBI issued five-year bonds in January this year at spread of 185 bps and these bonds are now trading at a spread of 140 bps. Meanwhile, Asia ITraxx Index for bonds' credit spreads has tightened by 36 bps this year," Shashank Joshi, MD & head-global corporate banking, India at MUFG Bank, pointed out. He added that apart from other factors, demand for India credit has also been helped by investors wanting to diversify away from China.
Indian Railway Finance Corporation, say market watchers, could well pick up a billion dollars, as it is reportedly planning to do. The yield on a bond is the sum of the benchmark yield and the credit spread on that paper. All other things remaining stable, a fall in the US treasury yield brings down the cost of borrowing funds in the dollar bond market. In 2019, the 10-year US treasury yield dropped almost 100 basis points from 2.78% in January to 1.81% by November.