Bankers are expecting Indian borrowers to show more interest in dollar bonds as onshore liquidity deteriorates, though such deals could be hard to sell given the macro conditions in India.
The government faces a growing budget deficit and the rupee continues to weaken, which has prompted the central bank to tighten liquidity by raising the lending rate to commercial banks by 200bp to 10.25%. This domestic liquidity squeeze is making offshore rates seem more attractive, encouraging a number of Indian borrowers to consider the dollar market.
Among the potential borrowers that recently held roadshows are L&T Finance and IDFC. A number of public sector companies and Indian banks could also tap the market, while there is also talk of an Indian sovereign dollar bond, to be sold to non-resident Indians.
The pipeline is expected to be worth about $6 billion to $8 billion, according to one banker, though others suggest it could be far more — as much as $20 billion.
Meanwhile, spreads on dollar bonds issued by Indian banks have widened by about 40bp to 50bp since mid-July, according to a report by Nomura.
Indian borrowers also face restrictions on overseas borrowings. Issuance has been hampered in part by the 20% withholding tax on offshore bonds (with the exception of those issued by infrastructure companies), as well as the Reserve Bank of India regulation capping the cost of external borrowings for Indian companies at Libor plus 500bp.
However, with the rupee weakening, bankers suggest that the government may want to encourage companies to issue in dollars and swap back to local currency, which would reduce selling pressure on the rupee.
“The rupee has hit an all-time low and the government is trying to stem that, so they have been tightening rates,” said one banker. “It is difficult for Indian companies to raise funds overseas, so maybe the government will try to make it easier.”
The mood is decidedly bearish but some bond investors think there could be value. “The RBI is tightening onshore and bond yields have risen by 60bp to 70bp,” said the investor. “This affects all the Indian banks as they hold government bonds and have to mark to market. But if your view is that the onshore tightening is temporary and rates could fall later on, there could be value.”
But there are risks, particularly since India is on the cusp of slipping back into junk territory. The sovereign is rated Baa3/BBB-/BBB-. Morgan Stanley recently downgraded its view on Indian credit to underweight from equal weight, citing rising macro risks.
“The prospect of a significant increase in bond issuance at a time when fundamental credit trends in India are deteriorating makes a challenging combination for Indian SOEs and financials,” the report said.
