BackPlans to sell quasi-sovereign bonds may be shelved
High fundraising costs, lack of domestic avenues to invest the money, stable rupee seen as deterrent
Premium(Priyanka Parashar/Mint)
New Delhi: Three state-run financial institutions may shelve plans to raise as much as $4 billion by selling quasi-sovereign bonds overseas, deterred by high fund-raising costs and a lack of domestic avenues to invest the money.
An easing current account deficit (CAD) and a stable rupee have also reduced the need for foreign borrowing.
The government in August asked these institutions to sell quasi-sovereign bonds in external markets to help bridge a then-ballooning CAD, stem the depreciation of the Indian rupee, which was nearly 69 to a dollar and beef up India’s foreign currency reserves of around $280 billion.
India Infrastructure Finance Co. Ltd (IIFCL), Indian Railway Finance Corp. Ltd (IRFCL) and Power Finance Corp. Ltd (PFC) were asked to raise a combined $4 billion by selling such bonds to fund long-term infrastructure projects.
“The hedging costs are very high. And there is not much demand for funds domestically. Where will we deploy these high-cost funds?" said an official from IIFCL. “We can easily raise funds in the domestic market at a much lower cost."
Slowing economic growth and delayed project approvals have forced many companies to put investments on hold, reducing demand for corporate credit.
The IIFCL official, who didn’t want to be named, said that given the improvement in the current account deficit, pressure from the government to raise foreign funds has also eased.
“There is not much talk on raising the funds now. It is on the backburner," he added.
While funds are available domestically at an interest rate of around 10%, overseas borrowing costs will be at least 1 percentage point more, he said.
India will be able to restrict its CAD to $50 billion in the year ending 31 March, finance minister P. Chidambaram said on 15 January, compared with an original target of $70 billion and a record $88.6 billion in the last fiscal year.
As exports grew and gold imports fell, the deficit—the sum of the balance of trade and invisibles such as remittances and software earnings—narrowed to 1.2% of gross domestic product in the July-September quarter. It was 4.9% of GDP in the fiscal first quarter ended June and 5% a year ago for the quarter ended September.
The rupee has recovered to around 62 to a dollar, closing on Thursday at 61.93 per dollar. Last year, it slumped 11.01% against the US currency.
IIFCL and PFC had the mandate to raise as much as $1.5 billion each and IRFCL up to $1 billion.
“IRFCL had tried to raise funds but that met with a tepid response. Given that experience, these plans have been put on a hold," a top PFC executive said, requesting anonymity. “We may have to wait for the scenario to improve to go forward."
An IRFCL official confirmed that the company had not been able to raise overseas funds. “We have no plans to try again. We will raise funds from other sources in needed," he said, also requesting anonymity.
Sovereign bonds are debt sold by a government. Quasi-sovereign bonds are debt sold by institutions with government backing.
“Given the interest rates and the hedging costs, it may not be viable for companies to borrow from abroad when there is no sufficient demand locally," said Ananda Bhoumik, senior director at India Ratings and Research Pvt. Ltd. “One reason why the government may not be desperate to get foreign funds is because of the $30 billion banks collected under RBI’s subsidized swap window," he said.
In September, the Reserve Bank of India (RBI) offered to hedge foreign exchange deposits of banks at a fixed 3.5% to attract foreign funds, which received a very good response from banks.
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