Several Indian banks which had postponed their MTN programmes due to difficult market conditions overseas Canara Banks issue was to have hit the market in July might end up paying a significantly higher coupon as spreads for Indian paper have trended up by close to 90 basis points (bps) over the last seven months.
Union Bank of India, which had mopped up $350 million through a 5.5-year bond issue in April, had forked out just 3.63%. Since then, the spread charged over the US treasury yield has also gone up sharply while Union Bank paid 300 bps over the five-year treasury yield Canara Bank coughed up 385 bps. At the same time, the jump in the yield on the US treasury had added to the cost. Between April and now, the yield on the five-year treasury has risen by nearly 75 bps on Friday, they were at 1.42%.
Bankers cite a host of reasons for the higher spreads from better growth prospects in the United States to the adverse macroeconomic conditions in India. Nevertheless, there are takers for Indian paper at higher yields. Canara Bank saw its issue subscribed four times over with bids received from across geographies, bankers pointed out.
Once the tapering starts, the yield on the treasury could rise further. Its possible therefore, that other banks might tap the market right away, an executive at a public sector bank observed.
However, given that wholesale rates have eased after the Reserve Bank of India (RBI) lowered the rate on the Marginal Standing Facility (MSF) twice, first by 75 bps on September 20 and again by 50 bps last week, banks might refrain from taking advantage of the swap window opened by the central bank last month.
When the swap window was opened in September, the MSF was at 10.5%. This meant borrowing funds overseas and swapping them in India, at 100 bps below the prevailing market rate, would give banks an advantage on the pricing. However, with the MSF now at 9%, theres no arbitrage for banks though foreign inflows would boost the countrys reserves. Last week, RBI governor Raghuram Rajan said $5.6 billion had come in via the two swap windows. RBI has allowed banks to borrow in foreign currencies up to 100% of their Standard Tier-I capital at a concessional 100 bps on the prevailing swap and has also offered a special window for funds acquired through three- and five-year foreign currency non-resident (FCNR) deposits at a fixed swap rate of 3.5%.
At the end of May, Federal Reserve chief Ben Bernanke had said a decision to cut the current pace of bond purchases may be taken at its next few meetings. However, at its September meeting, the Fed decided to continue with the pace of asset purchases. The Fed has been purchasing treasuries and mortgage-backed securities at a monthly run rate of $85 billion under its quantitative easing programme.