India 2005 - Rupee debt volumes
A rising interest-rate outlook and the availability of other cost-effective funding options may prompt Indian borrowers to issue less in rupee-denominated bonds. So after a solid start to the year, bankers expect rupee bond issuance volumes to taper off in coming months. As a result, issuance is unlikely to surpass the US$10.5bn tally seen in 2004, reports Shankar Ramakrishnan.
Issuance volumes in India’s domestic bond market have been rising steadily, but its growth has been restrained over the last couple of years by a growing array of alternative funding options for Indian issuers. Up to August 8 2005, Indian rupee bond issuance volumes totalled the equivalent of US$8.8bn, and although the primary bond market could match the levels attained in 2004, surpassing them will be difficult.
Thanks to increased offshore interest for Indian credits, Indian borrowers now posses the enviable flexibility of choosing a variety of options in order to reach the most cost-effective funding solution. And this same flexibility will ensure that supply is diverted away from the rupee bond markets, said bankers.
“Indian rupee bond issuance volumes could be flat or slightly lower than last year because of more cost-competitive offshore funding and rising interest rates at home,” said Kaustubh Kulkarni, vice-president of debt capital markets at ICICI Securities.
Bankers expect domestic bond supply to be hijacked by offshore loan and bond markets, and even rupee loan and equity markets. Of these opportunities, perhaps the offshore loan market is likely to capture the majority of supply as international banks have increasingly turned their balance sheets towards India in the hunt for yield and diversity. Lending also allows the banks to participate in the India story. Taking exposure to Indian credits gives them an indirect exposure to the buoyant Indian economy.
Issuance of foreign currency bonds is also expected to rise. In 2004, Indian companies raised US$1.75bn in offshore bonds compared with US$297m a year earlier. The 2004 total could be matched again in 2005 as there is a strong pipeline of Indian borrowers looking for offshore funds. Changes in regulations coupled with expectations that the Indian rupee will appreciate against the US dollar should also encourage the flow. Up to August 8 2005, Indian offshore bonds have totalled US$245.6m.
“Borrowers will also look at offshore funding as an opportunity to diversify their funding portfolio,” said one banker.
Offshore markets are attractive, not only because the after-swap cost of funds beats that in the domestic rupee market, but they also afford the potential of issuing in larger sizes and longer maturities to a different set of investors.
“Though Indian corporates continue to have significant funding requirements for the year, many of the larger and better known names would prefer to go the way of ECBs (external currency borrowing) or FCCB (foreign currency convertible bonds) since funding costs would be cheaper in the international market,” said a trader from the Mumbai office of an American bank.
In July, the State Bank of India placed €100m of five-year bonds at the equivalent of about Libor plus 70bp. Bankers say that a similar issue done in US dollars would probably come at Libor plus 75bpm, while a domestic five-year bond would have priced at the equivalent of about Libor plus 125bp in the rupee market.
Domestic bond issuance may also lose out because local interest rates are expected to rise. Although the Reserve Bank of India (RBI) – against expectations – held its benchmark short-term interest rates unchanged at 5% on July 26, it is widely expected to raise rates in the next six months by another 25bp–50bp.
Bond markets will also have to compete with the booming domestic equity market. India was Asia’s most active market equity capital market in the first half of the year, while Bombay’s Sensex index was the second best performing regional stock market in the seven months to August.
“Nevertheless, domestic debt issuance will be reasonably healthy as many borrowers with modest funding requirements could find it more convenient to issue domestically,” said ICICI's Kulkarni.
In spite of the competition from alternative funding routes, many Indian corporates just do not have access to them, and so will continue to issue domestically. Regulations restrict a wide array of Indian borrowers from accessing offshore markets and, in addition, international bank liquidity is not readily available to all Indian corporates but restricted to the top line borrowers. As a result, the bulk of issuers could still find tapping Indian
rupee loan or bond markets as a more convenient option. In coming months market players expect public sector entities (PSE) to feature heavily, and PSEs likely to tap about Rs5bn each are National Thermal Power Corp, Indian Railways Finance Corp, Power Finance Corp and Rural Electrification Corp.