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The Economic Times

Sliding rupee: Non-rupee bond sales down to 4-year low

MUMBAI: The sale of non-rupee bonds has plunged to a four-year low as corporates whipsawed by a sliding rupee and increasing spread overseas preferred to borrow from local lenders.

The decline in sale of bonds, denominated in currencies that are stronger than the rupee, nullifies the Reserve Bank of India's efforts to bring in dollars through overseas borrowing to stabilise the Indian currency.

The total amount raised by Indian companies through non-rupee denominated bonds, including the US dollar, Swiss franc and Chinese yuan, fell to $16 million in May from $3,146 million a year ago, according to data from Dealogic.

This is an outcome of the decline in the Indian currency, which made repaying debt in stronger currencies more expensive for Indian firms that earn in rupees. Since February, the rupee has weakened by more than 14%, touching 56.40 per dollar in May.

"Apart from a very weak currency, the overall hedging cost would have been very high for any corporate to have borrowed in dollars or other stronger currencies," said Parthasarthy Mukherjee, president, treasury and international business, Axis Bank.

In February, Rural Electrification Corporation and IDBI Bank issued Swiss franc bonds and IL&FS and ICICI Bank raised bonds denominated in Chinese yuan. Experts said companies borrowing in non-rupee currencies face the dual risk of interest rate fluctuation in the country they are borrowing from as well as exchange rate risk. "Anybody who borrowed in currencies that have weakened lesser than the rupee against the dollar would have got a great offset, assuming they were un-hedged," said Harihar Krishnamoorthy, head, treasury, FirstRand Bank.

Since January, the Swiss franc has weakened by 3.10% against the dollar, while the Chinese yuan has fallen by 1.27%. Companies also refrained from issuing non-rupee bonds due to the widening credit spreads amid increasing risk aversion among investors.

State Bank of India Credit Default Swap (CDS) spread on five-year bonds, which acts as a proxy of Indian sovereign bonds among foreign investors, widened to 405 basis points on June 1 from 186 bps on April 7, 2011, reflecting the increasing risk aversion among foreign investors. "Everyone wants to reduce funding costs. Global markets are in turmoil. Secondary market spreads have shrunk," said Melwyn Rego, executive director, IDBI Bank. "There is a slight lull in the market. But things change quite fast in these markets. Appetite will pick up by the end of this year."

However, experts said given the expectation that the central bank may lower interest rates in the coming months to boost growth, issuers will increasingly look at domestic borrowing. Defying widespread expectations, the RBI on Monday kept policy rates steady saying a cut would aggravate the high inflation.

However, going ahead, companies would prefer to borrow locally, since the cost of funding is likely to come down in near future, said Mukherjee. "The non-dollar bond issuances have been cases in isolation, few and far between," he said. In the past year, interest rate arbitrage that issuers could make by borrowing overseas has been nullified, especially for corporates who have hedged their currency risks.

For instance, a corporate borrowing from overseas, through a five-year loan, will pay nearly 11.75% (6-month Libor, over and above the 500 basis points spread the issuer would likely get, adding to that, MIFOR or Mumbai Interbank Forward Rate at 6%), which is at par or just marginally lower than what corporates will get from local lenders.
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