Indian companies warm up to dollar debt as hedging costs drop

Mumbai: Dollar dreams are rising in India Inc. again, as lower hedging costs tempt companies to borrow abroad after a two-year gap. While financial companies have been among the biggest borrowers in the last five months, others also are getting their bonds rated by global rating agencies, three people familiar with the development said.

Hedging is designed to protect one’s investments from volatile price movements. The dollar-rupee one-year implied forward yield, a proxy for hedging cost, stood at 1.67% as of Tuesday, down 23 basis points (bps) from about a year ago, as per data from Bloomberg. Experts attributed this to the relatively strong performance of the Indian rupee, which is expected to hold steady against the dollar.

Some of the top companies that raised dollar bonds since January include Indiabulls Housing Finance ($350 million); IRB Infrastructure Developers Ltd ($540 million); Adani Green Energy ($409 million); and Shriram Finance ($750 million), according to data from Bloomberg. Besides, India companies raised a total of $7.7 billion through external commercial borrowings (ECBs) in March alone, against $3.8 billion in March 2023, as per data from the Reserve Bank of India (RBI).

Also Read: RBI must help demystify the market for government bonds to attract investors

“More and more companies are looking at the US dollar bonds market as a viable option now,” said Snehdeep Bohra, director at Fitch Ratings. “In the last two years, not much was happening in the dollar-denominated debt market due to higher interest rates and expensive hedging costs due to market volatility.” Bohra said hedging costs are coming down, coinciding with the US Fed signalling the end of the rate hikes regime. The recent trend in US inflation data could make a case for an interest rate cut later this year.

The rupee weakened 1.4% against the dollar in FY24, less than emerging market peers like Chinese yuan, Thailand baht, Indonesian rupiah, Vietnamese dong and Malaysian ringgit, as well as a few advanced economy currencies like Japanese yen, Korean won and New Zealand dollar.

Local borrowings were more attractive and competitive than foreign currency offshore borrowing in the last two years, a banker said, adding there are now signs of companies actively starting to consider offshore borrowing. While local borrowing is still more competitive, banks are seeing the pricing gap in comparison to offshore borrowing continuously compressing, he added.

Swap costs

Experts said that banking, financial services and insurance, or what is known as the BFSI segment, has an immediate need for credit. For project finance companies where loans are utilized as the project progresses, the swap rate or the hedging cost will vary between now and when the company uses the money, they said. However, for BFSI companies, it is more useful to raise money when hedging costs come down as the demand is immediate.

“There is a lot of interest but it is very sensitive to swap rates,” Rajat Verma, managing director and head of institutional banking at DBS Bank said in a recent interview. “With rupee, it is predictable what the rupee bond prices or loan prices are but swap costs are not under your control. That varies with other variables in the market.”

Verma said he has witnessed a lot of interest in the recent past and believes it to be a healthy thing. “We have led several of those transactions in the first three months of the year and our loan syndication team has been really busy, taking these companies on roadshows, increasing the size of these deals,” he said. DBS recently led a $100 million syndicated ECB loan for HDFC Credila Financial Services through its unit in the Gujarat International Finance Tec-City (GIFT City).

Also Read: Global government bonds face period of temporary calm

Demand yet to pick up

Others said that while there is increasing interest among potential borrowers, demand is yet to substantially pick up. Venkatakrishnan Srinivasan, managing partner, Rockfort Fincap Llp, a financial advisory firm, said that more ECBs are being raised than dollar bond issuances by companies and these are working out cheaper compared to dollar bonds for most of the entities.

“Several public sector enterprises are looking to issue dollar bonds just to diversify their overall borrowing,” said Srinivasan. “Many non-banking financial companies (NBFCs) are opting to raise debt abroad, not because it is cost-effective, but due to the Reserve Bank of India's (RBI) increase in risk weightage (for bank loans to NBFCs).”

This, he said, has driven them to seek alternative sources of funding. That apart, some companies are unable to attract strong interest in the domestic bond market, prompting them to look overseas for funding opportunities. 

Read more: Can India make the world use rupees instead of dollars? Maybe, but not yet