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India to pitch global rupee bond sales with world-beating growth

While the rupee has advanced 1.1% against the dollar this year amid mounting bets for more economic strength, the government has sought to cut risks for borrowers in foreign currencies after the unit dropped 2% in 2014. Photo: MintPremium
While the rupee has advanced 1.1% against the dollar this year amid mounting bets for more economic strength, the government has sought to cut risks for borrowers in foreign currencies after the unit dropped 2% in 2014. Photo: Mint

The RBI proposed to allow Indian issuers to sell bonds abroad denominated in the local currency for the first time on 7 April

Singapore/Mumbai: India is urging companies to sell global rupee bonds as forecasts for the economy to grow the fastest in the world fuel international demand for the nation’s debt.

The Reserve Bank of India (RBI) proposed to allow Indian issuers to sell bonds abroad denominated in the local currency for the first time on 7 April. Indian Railway Finance Corp. said three days later it would explore such an offering. International Finance Corp., the World Bank’s private-sector financing arm, was the first to offer rupee notes that can be traded offshore in 2013 and has issued the equivalent of $1 billion.

India’s economy will likely expand 7.5% this year, surpassing China, according to International Monetary Fund (IMF) forecasts. As central banks in the US, Europe and Japan keep interest rates near zero, global investors including BlackRock Inc. and PineBridge Investments have turned to higher-yielding onshore rupee corporate debt, using up 78% of their overall $51 billion cap for such securities.

“Quantitative-easing money is going to mostly flow into emerging markets and India looks the best case for now," said Koen Vanderauwera, a portfolio manager in Luxembourg at KBC Asset Management SA, which oversees the equivalent of $220 billion globally including Indian debt. “If the offshore rupee bond offerings cover the risk and offer reasonable returns, investors would look at them favourably."

Unprecedented fundraising

Companies turned to rupee bonds for a record 24.5 trillion of financing last year, as domestic loan growth slumped. That exceeds the 3.23 trillion that Indian mutual funds had allocated to debt by the end of March, according to data from the Securities and Exchange Board of India (Sebi).

Local companies have already started to ask bankers to prepare offshore rupee deals, said Avinash Thakur, managing director of debt capital markets for Barclays Plc in Hong Kong.

“For issuers it’s a no-brainer," he said. “A lot aren’t able to borrow in dollars because of local rules and there is only so much debt that can be sold in the local rupee market."

The IFC issued the first such deal in 2013 and has built up the equivalent of $1 billion in outstanding securities. The establishment of the debt program took over six months of preparation with local regulators, according to Julean H’Ng, associate financial officer for the IFC in Hong Kong.

Currency risk

The most recent such note by the IFC was sold in November at a yield of 6.3%, 190 basis points below the return on 10-year Indian government bonds at the time, according to Bloomberg-compiled data.

Such low yields on rupee debt are unlikely for even the best Indian issuers, which are rated BBB- by Standard and Poor’s, compared to the AAA grade held by the IFC, said Alan Roch, the Singapore-based head of Asia-Pacific syndicate at Royal Bank of Scotland Plc.

While the rupee has advanced 1.1% against the dollar this year amid mounting bets for more economic strength, the government has sought to cut risks for borrowers in foreign currencies after the unit dropped 2% in 2014.

“The incentive for the sovereign and its issuers is unquestionable as it allows many companies to remove foreign exchange risk from their funding" he said. “There are however many practical hurdles that need to be overcome before that market meaningfully takes off, for it to be successful this has to be done hand in hand with the international investor base."

Pent-up demand

Foreign buyers have to apply for a quota to buy bonds onshore in India, restricting the amount they can invest.

“The interest levels for Indian bonds is quite high," said Kaushik Rudra, global head of rates and credit research at Standard Chartered Plc in Singapore. “With the Indian government bond quota full and the corporate quota fast getting exhausted, this provides international investors another option to access the markets."

Offshore bond buyers are likely to embrace it, according to Amanda Stitt, a London-based investment director at Legg Mason Global Asset Management, a unit of Legg Mason Inc., which had $702.7 billion under management at the end of March.

“Personally, and I have to say personally because I haven’t talked to the portfolio managers about this, I think there will be a high demand for that," she said. “The international investment community is very much favoring India for the right reasons and a lot are challenged to get the positions they want."

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