Indian Issuers Pause Dollar Bond Plans Amid Demand for Higher Yields
Indian corporations and public sector banks are hitting the pause button on their international dollar bond fundraising plans. This strategic delay comes as global investors demand higher yields to compensate for an anticipated surge in bond supply from India.
The Tug-of-War Over Pricing and Yields
A clear divergence in pricing has emerged between different Indian issuers, creating a "tussle" between those looking to borrow and those looking to lend. While HDFC Bank successfully kicked off the market last week by raising $750 million in five-year bonds, it achieved a highly favorable spread of just 90 basis points above the five-year US Treasury.
However, subsequent issuances have seen much wider spreads. State-run Power Finance Corp (PFC) recently raised $300 million but had to price its five-year bond at 105 basis points above the US benchmark—a 15-basis-point difference compared to HDFC. This rising cost of borrowing has prompted major institutions like State Bank of India (SBI) and Bank of Baroda (BoB) to halt their planned dollar bond issues. These issuers are currently weighing whether the cost of capital is too high to remain profitable, opting instead to wait for the market to cool down.
Shifting Strategy: From Bonds to Bilateral Loans
As the bond market becomes more expensive, many Indian entities are pivoting toward the bilateral loan market. Unlike bond issuances, which require extensive roadshows and complex investor meetings—especially for debut issuers—loans offer a faster route to capital.
Development Finance Institutions (DFIs) are leading this shift. The National Bank for Financing Infrastructure and Development (NaBFID) is currently looking to raise between $500 million and $1 billion in loans. NaBFID Managing Director Rajkiran Rai noted that while pricing has increased, they expect to secure funds within the 6.5% to 7% range. Similarly, other major DFIs including Nabard and Sidbi are reportedly looking to borrow a combined $1.5 billion through foreign-currency loans. Bankers suggest that bilateral deals provide more flexibility for borrowers compared to the rigid pricing demands of the public bond market.
Leveraging RBI’s Special Swap Arrangement
To mitigate the risks associated with foreign currency volatility, banks and Public Sector Undertakings (PSUs) are utilizing a special swap arrangement provided by the Reserve Bank of India (RBI).
Under this mechanism, an issuer can sell dollars to the RBI and simultaneously agree to buy them back at the end of the loan tenure at a fixed rate of 1.5% per annum, compounded semi-annually. This specific facility is highly attractive because it effectively removes the need for issuers to invest in expensive hedging tools to manage future dollar liabilities, making foreign-currency loans a more viable alternative to bonds in the current high-yield environment.
Key Takeaways
- Pricing Divergence: Recent issuances show a widening gap in spreads, with HDFC Bank pricing at 90 bps above US Treasuries while PFC required 105 bps.
- Strategic Pivot: Major issuers like SBI and BoB have paused bond plans, with DFIs like NaBFID shifting focus toward the faster and more flexible bilateral loan market.
- Hedging Advantage: The RBI's special swap arrangement is helping PSUs manage currency risk by allowing them to fix buy-back rates at 1.5% per annum.