India’s stock market may have scaled new peaks in 2017 but it’s the bond markets that have really caught the fancy of foreign investors this year. With less than a month to go, Indian companies and firms have raised around $40 billion from foreign investors; that’s more than a ten-fold jump over the amount they picked up in 2016.
Manish Wadhawan, MD & head, Fixed Income, Global Markets, HSBC India, says with masala bonds and dollar bonds having attracted robust demand from overseas investors, foreign fund flows into Indian debt are at the highest ever in the last 15 years. The biggest chunk of $23 billion has flowed into the domestic markets where foreign portfolio investors have snapped up both gilts and corporate paper. Close to $16 billion has been mopped up by borrowers in the overseas dollar markets while around $2 billion has been picked up by companies via masala bonds.
Even before Moody’s upgraded India’s sovereign rating to Baa2 on November 17, the appetite for Indian paper was high. For example, spreads at the beginning of the year, on investment grade five-year USD bonds issued by Indian banks were around 150 basis points over five year US Treasuries. Today, these spreads are in the range of 100 to 125 bps, pointing to a 25-50 basis points compression. As Neville Fernandes, head, debt capital markets, Citibank, says there has been a compression in dollar bond credit spreads in 2017. “The tightening in credit spreads for sub-investment grade dollar bonds issued by Indian corporates has been higher with spreads tightening by approximately 50-75 basis points during the year,” Fernandes noted.
Post the upgrade, borrowing costs have come down further as seen from the recent issuance by Power Finance Corporation (PFC). The company priced its $400-million dollar bonds at just 157.5 bps over US treasury. Investment bankers said this was possibly the tightest spread for 10-year paper issued by public sector units, in about 15 years. PFC’s bonds were rated BBB- by S&P. Fernandes says two key factors have contributed to the reduction in credit spreads. “From a global perspective, abundant liquidity, significant scarcity of Indian USD bonds and diversification needs of global investors have contributed to strong demand,” he points out, adding India also enjoys political and economic stability. Madhur Agarwal, head, debt capital markets, JP Morgan India, believes the appetite for Indian paper is even higher post the upgrade and has translated into lower costs for borrowers.
“We have seen an average tightening of around 5 bps for investment grade names in India post the rating upgrade by Moody’s. The tightening has been higher for quasi sovereign names given the direct upgrade in ratings for many of them,” Agarwal said. In some instances, investors have been willing to accept a slightly lower yield for paper with a longer tenor. For example, Vedanta Resources was able to priced its seven-year dollar bonds at a coupon rate of 6.125% to raise $1 billion in August. In January, the company had priced its dollar bonds with a tenor of 5.5 years at 6.375%, according to Bloomberg data. Wadhawan said both the dollar bonds and the masala bonds have rallied this year with yields falling by 30 to 50 basis points.