Indian corporates have gone on a borrowing spree in international debt markets, a trend that's set to continue owing to the country's improving economic outlook and healthy investor appetite, according to analysts.
Foreign currency bond issuance by non-financial companies reached $11.2 billion for the January-July period, surpassing the $10.2 billion reached in 2013, according to Moody's Investors Services. It's expected to reach a record high of $13-14 billion this year, and could be higher in 2015 if the cost of hedging exchange-rate risk declines, Moody's predicts.
"Clearly public sentiment around India is positive, and it makes sense for companies to take advantage of that to raise capital at a lower cost than what they were able to do earlier," said Manpreet Gill, head of fixed income, currencies and commodities investment strategy at Standard Chartered Bank.
A year ago, investors were fretting over a potential credit ratings downgrade for India, now focus has shifted to the prospect of game-changing reforms under the new government.
What the rise in issuance by Indian corporates means for investors is that they will have more options to choose from in the Asian corporate credit space.
"Asian corporate credit is dominated by Chinese issuers at the moment, so for investors an increase in issuance by Indian corporates is a positive as it helps with geographical diversification," said Gill.
Who's issuing debt?
Three sectors - oil and gas, metals and mining, and telecommunications – are responsible for the bulk of borrowing.
Going forward, energy and mining firms are expected to continue driving the increase in issuance alongside pharmaceutical, IT and business process outsourcing companies. Such firms derive a large part of their revenues from exports, which are typically denominated in U.S. dollars. This provides a natural hedge against currency fluctuations for their U.S. dollar-denominated debt.
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Interest rates on foreign currency bonds are lower than those on rupee denominated bonds, but the cost of hedging exchange-rate risk makes it more expensive for Indian entities to borrow in foreign currency. It therefore makes sense only for companies with natural hedges against currency fluctuations to issue bonds in foreign currency, Moody's said.
Issuance by infrastructure companies is also set to rise given their large funding needs. Overhauling India's dilapidated infrastructure is high on the agenda for the new government, which has vowed to spending billions on building roads and highways, high-speed rail networks, airports and ports.
Factors encouraging issuance
Continued tight monetary policy in India, as a result of persistently high inflation, means the cost of borrowing locally remains elevated and the availability of credit remains tight, Moody's said.
These challenges contrast sharply with the international capital markets, which are currently liquid and offer extremely low interest rates.
"This imbalance will encourage more Indian institutions to tap the international markets to fund their growth and investments."
In addition, recent regulatory changes have reduced barriers for Indian companies to tap the international markets to fund their growth and investments.
For example, the new government reduced the withholding tax on interest payments to international investors to 5 percent from 20 percent.
The high 20 percent tax had been a major barrier for Indian companies issuing foreign currency bonds because the debt issuer makes the tax payment over and above the coupon on the bonds, Moody's said.