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Risk premium on Indian bonds comes down

The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA)’s return to power at the Centre has resulted in compression of global bond spreads for Indian corporates and banks in the secondary market.

Since April 30, spreads have shrunk by 10-100 basis points for various five-year papers. Due to this, it is probably the right time for Indian firms in need of funds in the next one year to go and tap the international bond market. Much of the funds that corporates might raise could get utilised in re-financing the old credit, helping bring down interest costs and increase tenure for re-payments, said bankers.

“The investor interest in Indian offshore bonds continues to be strong. The recent electoral verdict has provided a stability-led momentum, leading to further tightening of spreads. We expect quality issuers from India to receive a strong investor demand,” said Manmohan Singh, managing director (debt capital markets-Asia), RBS.

Spread is the difference between the global bond yields, listed by an Indian firm and the US Treasury of similar maturity tenure.

Sanjeev Lall, head of institutional banking group, DBS Bank, said the easing of risk spreads on Indian paper reflects genuine change in the market perception about the Indian economy and business. There is hope that the new government would take firm steps to spur economic growth.

Lall said the market perception for better future is also backed by assessment by credit rating agencies. Moody’s has described a clear majority for the BJP as “credit-positive”.

According to experts, global investors are looking for opportunities to invest in emerging markets. With China’s growth slowing down, India is a preferred destination for investors.

“Global investors believe there are a lot of opportunities for India due to which they want to invest not only in equity but also in debt. This is a right time for Indian corporates and banks to tap the market due to positive sentiments and there is enough liquidity in the global markets because growth in China is slowing down and global investors want to invest in countries like India. Depending upon their fund requirements, corporates and banks can now tap the global market for funds and that too at tight pricing,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.

A further compression in spreads will depend upon inflation control and steps taken by the government to speed up reforms. “The spreads could ease further depending on future course of policies. While Indian companies will take the benefit of the relatively cheap money, it will be more for refinancing existing debt to reduce interest cost burden and extend tenure of credit. Fund-raising for capital expenditure might begin to happen only after a few quarters,” said a senior executive involved in syndication at a foreign bank.

However, it is agreed that currently it is cheaper for Indian firms to raise funds globally, as compared to a few months ago. “Currently, Indian corporates and banks can probably raise funds by about 25-50 basis points in the coupon rate. A new issuer will probably raise funds at a lower coupon than what they would have paid in December,” said an issue arranger.

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