US Fed rate cut to spur more Indian corporates to tap offshore bond markets

The rate cut announced by the US Fed may incentivise more Indian corporates to tap overseas bond markets

The larger-than-expected 50 bps rate cut by the US Federal Reserve on Thursday is likely to prompt more Indian companies to explore the offshore debt markets, as foreign loans become cheaper.

Fed chairman Jerome Powell delivered the large cut, driven by the US central bank’s increased confidence that the country's long battle with inflation had come to an end.

“The September FOMC (Federal Open Market Committee) meeting was a key event from the market perspective given its expected pivotal role in rates trajectory going forward. With this key economic event behind us now, we expect more issuers to start evaluating to access the USD bond market. While pricing is an important consideration for Indian borrowers, the decision of accessing offshore bond market also hinges on parameters like diversification strategy, tenor and size,” said Prathamesh Sahasrabudhe, MD, Head, Capital Markets, India & South Asia, Standard Chartered Bank said.

The rate trajectory

Rising interest rates following the start of the Russia-Ukraine conflict in early 2022 and the resultant rise in global energy and commodity prices led to a global battle against inflation, which saw central banks across the world sharply increasing their policy rates and ending the post-Lehmann long era of zero interest rates.

Against this backdrop, funds raised through offshore bond issuances by Indian companies fell to their lowest number in six years in calendar year 2023 to $4.32 billion across seven deals, as per data from LSEG Deals Intelligence.

Already, in the first nine months of the calendar year 2024, amid high but stable interest rates, more Indian companies have tapped the offshore bond market to raise $6.32 billion, across 18 deals.

Thus, the rate cut comes as welcome news for Indian corporates, which want to access foreign markets to raise long-term loans as well as for those which already have existing exposure to offshore loans.

Experts said that lower interest rates will make market access easier for high-yield debt issuers or junk bond issuers – companies with credit ratings lower than the minimum investment grade.

“US Fed rate cuts lower borrowing costs and boost investor appetite, creating a favourable environment for Indian companies, especially high-yield issuers, to tap into the US dollar offshore bond markets,” said Elaine Tan, Senior Manager at LSEG Deals Intelligence.

Easing interest rates could also ease up other funding avenues such as acquisition finance and Term Loan B (TLB), a route that was becoming popular with Indian tech companies to raise funds in the US markets, before interest rates turned and soured the appetite for such loans.

“Indian corporates have used the US as the hub for offshore acquisitions. Additionally, USD as a currency has also played a strong role in the financing world. A combination of these aspects will see a surge in the acquisition financing world for Indian corporates and a hope remains that this could lead to a renewed interest in the rarely resorted to option - TLB Loans,” said Veena Sivaramakrishnan, Partner - Banking & Finance and Insolvency and Bankruptcy Practice, Shardul Amarchand Mangaldas & Co.

Smruti Shah, Partner, Cyril Amarchand Mangaldas added that lower US interest rates may drive global investors to seek higher returns in India, potentially increasing Foreign Portfolio Investment and Foreign Direct Investment.

“The amount of funding Indian corporates can target to raise from the US and other overseas markets with loosened monetary policy would depend on several factors, including, investor sentiment, market conditions, global market dynamics and sectoral demands,” Shah added.

Financial companies to benefit

Experts said that non-banking finance companies (NBFCs) are likely to be among the primary beneficiaries of the rate cut, driven not just by lower borrowing costs but also by the Reserve Bank of India (RBI) directives to reduce dependence on banks to meet their capital needs.

"We have been seeing a lot of demand coming from finance companies. One, of course, there is diversification and second, the RBI has also been asking finance companies to reduce their linkages with banks. So the combination of these factors plus the fact that Fed rate would decline would make some of the foreign currency borrowing attractive,” said Geeta Chugh, Managing Director - Financial Sector Ratings, S&P.

“International investors seem to have a relatively high appetite for India, given the country’s strong economic growth prospects. There is a lot of appetite for Indian paper and we do expect that there could be more issuances coming from India,” she added.

Cheaper loans at home

The rate cut decision by the US Fed may also encourage other central banks including the RBI to cut rates and thus reduce borrowing costs for India Inc in the domestic markets too, said experts.

“A corresponding cut is expected by the RBI, if not immediately, maybe shortly, if not 50 bps, maybe in multiple tranches. For India Inc, this will be some respite in the borrowing cost. Because, as you know, in the last 2-2.5 years the borrowing cost has increased drastically,” said Kunal Sanghavi, CFO, HDFC Securities.