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India's primary dollar bond market dries up as Fed rate hikes send the greenback soaring

There has not been a single issue this fiscal by Indian corporates and banks against $13.3 billion raised by them in FY22. Issuances may remain muted near term and many issuers may refinance earlier dollar borrowings with onshore debt or buy them back in the secondary market, experts said

September 22, 2022 / 04:19 PM IST
(Representative image: Reuters)

(Representative image: Reuters)

Aggressive rate hikes by the US Federal Reserve and a falling rupee have virtually shut India's primary dollar corporate bond market with not a single issuance by banks and companies during this fiscal, experts told Moneycontrol.

This is against $13,370 million raised by Indian firms in FY22 and $8,985 million in FY21, according to data by Prime Database. US interest rates were at historical lows due to the Covid-19 pandemic, helping Indian corporates and banks to raise funds at a cheaper rate.

With the dollar turning expensive, many earlier issuers may also consider refinancing their dollar borrowing with onshore debt or buying back their overseas borrowings in the secondary market, experts said.

A dollar bond is a US dollar-denominated security where the principal and coupons are paid in US dollars. Whenever the dollar’s value rises, the cost of borrowing via a dollar bond increases too.

“The sharp dollar appreciation against most other currencies has meant that any unhedged dollar borrowing is now proportionately more expensive to repay,” said Churchil Bhatt, executive vice president and debt fund manager at Kotak Mahindra Life Insurance Company.


It is, therefore, natural for market activity in dollar bonds to dry up in such situations, as both investors and issuers attempt to reassess their lending-borrowing plans, he said.

With the dollar rising sharply in a short span, dollar bond issuances by non-US entities are likely to remain muted in the near term, Bhatt said. Instead, these issuers will rely on local currency borrowing from their domestic debt markets in the near term, he added.

Also read: Fed delivers third-straight big hike, sees more increases ahead

Why is the dollar rising?

While the impact of the pandemic has waned, inflation has spiked, prompting the US Fed to adopt an aggressive rate hike trajectory. US inflation rose to 8.3 percent in August, significantly higher than the Fed’s 2 percent target range.

The Fed raised interest rates by 75 basis points (bps) to 3-3.25 percent on September 21 and signalled more rate hikes. The Fed has raised rates by 300 bps so far in 2022. One bps equals one-hundredth of a percentage point.

“US expectations of risk-free rates are elevated. With inflation being stubbornly high, one cannot be confident how much higher the rates can go and how long they will stay elevated,” said Abhishek Goenka, founder and chief executive officer at IFA Global, a Mumbai-based forex advisory. “This uncertainty would have been a deterrent for Indian corporates looking to raise (funds through) dollar bonds.”

Rupee woes

The rupee has not been spared amid the dollar strength, which has risen against the emerging market currencies. The local unit has depreciated 8.6 percent so far in 2022, after falling to a record low of 80.77 on September 22. Analysts see more pain for the rupee in the coming days, which will raise the cost of borrowing from the US significantly, further deterring dollar bond fundraises, say experts.

The rupee has been under pressure since the Russia-Ukraine war began in late February. The Reserve Bank of India (RBI), as a regulator, is responsible for maintaining rupee stability. Whenever the rupee has depreciated significantly, the RBI has stepped into the market by selling dollars from its forex kitty, according to money market participants. India’s foreign exchange reserves fell to $550.87 billion as of September 9 from an all-time high of $642.4 billion last year, according to RBI data.

According to IFA Global’s Goenka, there are doubts over the RBI's ability to contain the rupee’s depreciation, given the pace at which it has “burnt” the reserves. Uncertainty over the rupee trajectory may also have acted as a deterrent for overseas fundraising, added Goenka.

Attractive local debt market

Bond market participants said besides cost differentiation between onshore and offshore borrowings, bond issuers are now more worried about the currency risks associated with dollar bonds. Hence, a lot of issuers, including banks, are choosing to raise funds from the domestic corporate debt market, they added.

“The Indian corporate market has become more attractive and the bond yields are competitive, considering the larger investor demand. Issuers are comfortable issuing onshore bonds as they find the prices are comparatively cheaper,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a Mumbai-based debt advisory firm.

Further, rising US bond yields and a weak rupee have led Indian bond issuers to rethink their dollar bond issuance at this juncture, added Srinivasan. In fact, many of the issuers may consider refinancing their earlier dollar borrowing with onshore market or buying back their overseas borrowings available in the secondary market at attractive yields, he said.

Kotak Mahindra Life’s Churchil Bhatt concurred with Srinivasan’s view.

“At the current juncture, corporate bond spreads in India are very tight and even the loan rates are highly competitive,” Bhatt said. “Hence, issuers may find it more attractive and cost-effective to borrow in local debt market than tapping the offshore debt markets.”

Also read: Indian rupee tipped to fall further after reaching record low, RBI key: Analysts

MPC decision key

Issuers looking to raise funds are eyeing the RBI-led Monetary Policy Committee’s (MPC) decision on September 30 and commentary to gauge the path of rate hikes and whether the Indian central bank would emulate the Fed in aggressive rate hikes, said bond market participants.

As such, economists are expecting a rate hike of 35-50 bps from the MPC this month. They see the terminal repo rate, or the rate at which the RBI lends funds to banks, between 6 percent and 6.50 percent by March from the current 5.40 percent.

“The Fed’s rather hawkish tone does alter the landscape even raising the possibility of a stronger hike but as of now we stick to our expectation of a 35 bps hike in the upcoming meeting,” said Kunal Kundu, India economist at Societe Generale. “The Fed action does raise the prospect of our expectation of the terminal policy rate going up from 6 percent.”

Jahnavi Prabhakar, an economist at Bank of Baroda, said the RBI will continue hiking rates but less aggressively than the US. The RBI will also keep an eye on growth, she said.

Gaura Sen Gupta, India economist at IDFC FIRST Bank had similar views.

“In India, while the recovery is progressing it is uneven with stronger growth in the formal sector and a weaker recovery in the informal sector,” said Sen Gupta. “At the same time, with the Fed showing its willingness to take policy rates to 4.6 percent by 2023, we revise up our terminal repo rate expectation to 6.50 percent.”
Siddhi Nayak is correspondent at She tweets at @siddhiVnayak
first published: Sep 22, 2022 04:19 pm
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