Indian borrowers have increased rupee bond sales to a record this year and the top underwriter sees a half percentage point cut in interest rates sustaining the momentum.
Offerings have jumped 50% from a year earlier to Rs2.1tn ($33bn), the most in data compiled by Bloomberg going back to 2009. Rural Electrification Corp and National Bank for Agriculture & Rural Development plan to increase sales, after yields on AAA rated rupee notes due in five years fell to a two-year low of 8.34% last month.
The financing boom is good news for Prime Minister Narendra Modi as he grapples with a sliding currency, falling stocks and rising oil prices. The Reserve Bank of India won more room to trim rates after data this week showed cooling inflation, according to Axis Bank Ltd By contrast, rising US borrowing costs have made dollar fundraising less appealing.
“Preference will be for local debt,” said Shashi Kant Rathi, Mumbai-based head for debt capital markets at Axis, the top rupee debt underwriter with a 17.4% share. “Dollar rates are yet to price in uncertainties of the global oil, currency and interest-rate markets.” Policymakers are seeking to sustain economic growth that the International Monetary Fund forecasts will surpass China this year at 7.5%. Rathi predicts the RBI will trim the repurchase rate by an additional 50 basis points this year.
Consumer prices rose 4.87% in April from a year earlier after a revised 5.25% increase in March.
Industrial production grew 2.1% compared with an estimated 3% rise. The rupee has tumbled 1.7% this quarter, the most in Asia after the Thai baht, as the Sensex stock index dropped 2.4%.
“The latest economic data probably give more scope to cut the benchmark rate,” Harsh Kumar Bhanwala, chairman at New Delhi-based National Bank for Agriculture, or Nabard, said in an interview on May 12. The lender will increase local debt offerings by about 7% this financial year, Bhanwala said.
Rural Electrification, which led issuance last year, is targeting slightly more rupee bond sales this financial year, according to Ajeet Agarwal, New Delhi-based finance director at the company. “Domestic bonds will be a major sourcing of funding for us this year.” Dollar-denominated notes won’t help save costs as the Federal Reserve may raise the benchmark rate this year, according to David Rasquinha, Deputy Managing Director at Export-Import Bank of India.
“Dollar borrowing rates will rise because uncertainties surrounding the global markets haven’t been fully priced in,” Mumbai-based Rasquinha said. “Therefore we are allocating most of our incremental borrowings this year to the local market.” Export-Import Bank will increase its borrowing this fiscal year to March 2016 to Rs320bn from Rs300bn in the previous year, Rasquinha said.
While a rebound in crude prices since March adds some pressure to consumer prices in a country that imports about 80 percent of its oil, the bigger effect will be on US Treasury yields, according to according to Rural Electrification’s Agarwal.
“Oil’s rise hits dollar rates instantly and inflation in India only later on, so the advantage of borrowing overseas is slowly waning,” Agarwal said. “The dynamics are quite different in the local market and that is stoking optimism of lower borrowing costs.”
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