US Treasury yields have been on the rise and this has impacted borrowing costs for Indian companies in the overseas market. Manish Wadhawan, MD and head — fixed income, global markets at HSBC India, tells Bhavik Nair that the overall costs for Indian issuers in international markets have gone up by 55-70 basis points (bps). Wadhawan also indicated that with the current account deficit for the year expected to be around 1.5-2% of GDP, the rupee is expected to depreciate by 3-4% on an annual basis. Excerpts from the interview:
US Treasury yields have been on the rise. How will this impact Indian bond issuers?
The sharp rise in US Treasury yields since the beginning of the year and the mild increase in the credit spreads recently for Indian issuers have had a combined impact of around 50-70 bps, in terms of yields in the offshore markets. The overall costs for Indian issuers in the international markets have gone up by 55-70 bps.
Come April, supply of G-secs will resume through weekly auctions. Do you think the current supply-demand mismatch will affect the yields?
The yields on Indian government bonds have gone up by around 100 bps since September 2017, on account of a variety of factors including higher inflation, spike in oil/commodities, tighter domestic liquidity conditions and international bond markets sell-off. I feel that a lot of negatives are already priced in and expect markets to stabilise near these levels. The supply calendar will definitely have some impact in terms of adjustment in yields but I don’t expect sharp movements from here. The liquidity conditions are expected to improve in the April–June quarter, and with the pickup in deposits in the banking system, the demand for bonds shall be robust. The risk to this view is unexpected spike in oil prices or a sharp pick-up in inflation, beyond RBI’s comfort levels.
How have the emerging market allocations been this year with the days of cheap money nearing an end?
After seeing positive flows in the first month in the emerging markets in bonds/equities, there has been a mild reversal in February for India. The flows in India have been moderate and we have not seen material risk aversion from the FPIs towards India. I expect the FPI flows in India to be positive for 2018, though it might accrue at a slower pace in comparison to previous years.
What route will be more attractive — foreign currency bonds or overseas syndicated loans?
The foreign currency bond markets have been the preferred mode for fund raising in the past few years and we feel that shall remain so as it offers the issuers a window to tap the sophisticated institutional investors and competitive pricing. The gap in pricing for the overseas syndicated markets is not too high but the bond route still remains the preferred path.
Where do you think the rupee is headed this year considering the Fed rate hikes and other factors?
The rupee, after a prolonged period of strength, has shown some volatility. The recent spate of data in terms of higher inflation, sharp increase in the monthly trade deficit and relative strengthening of US dollar have added to this. With the current account deficit for the year expected to be around 1.5-2% of GDP, we expect the rupee to depreciate by 3-4% on an annual basis.
A number of companies have lined up to issue masala bonds. How do you see this segment faring?
A spurt in masala bond issuances/activity was witnessed in 2017 and the yields dropped sharply, as appetite for Indian paper was quite strong from investors. We expect the activity in masala bonds to slow down a bit with the volatility in the fixed income markets and also with the change in regulations, which bring them in the ambit of ECB guidelines.