Modi recovery isn’t going as per plan for Indian dollar bond holders

Modi recovery isn’t going as per plan for Indian dollar bond holders
Mumbai: Already spooked by a global bond rout, foreign investors are wondering if their expectations for India’s recovery were just too bullish.
The average yield on dollar notes issued by Indian companies surged 23 basis points this month to as much as 4.69%, the highest in a year, as India’s government reported a 20% slump in exports, a surprise current-account deficit and a pickup in inflation. Standard Chartered Plc and Fisch Asset Management AG predict this year’s dollar-bond issuance will slide at least 15% from last year’s record.
Offshore investors are losing patience as Prime Minister Narendra Modi grapples with stalled projects and souring bank loans while struggling with a bill to ease land ownership rules for industry. Higher borrowing costs are ill-timed for India’s economy amid falling profits for listed companies and the slowest syndicated loans market in seven years.
“The Modi government actions haven’t yet resulted in stronger economic growth and a pick-up in the capex cycle, as reform measures will take time to take effect,” said Shilpa Singhal, senior credit analyst at NN Investment Partners Ltd, formerly known as ING Investment Management. “Investors may be disappointed that the recovery is not as fast as expected.”
Falling behind
Modi is struggling to get a bill passed in the upper house of parliament on laws making it easier for companies to acquire land for mills. His government also has a backlog of Rs.13.5 trillion of stalled projects amid plans to spend Rs.1 trillion on infrastructure this year, junior finance minister Jayant Sinha said earlier this month.
Indian companies sold an unprecedented $15.9 billion of dollar bonds in 2014. While sales are still ahead of a year earlier, at $7.1 billion compared with $6.9 billion, that growth may be derailed as global buyers retreat and issuers seek alternatives to higher offshore costs.
Not attractive
Power Grid Corp of India Ltd, a state-run electricity distributor, is sticking with local markets for funding needs as offshore borrowing costs aren’t attractive, finance director R.T. Agarwal said in an interview. That’s even as the company, whose previous dollar sale was a $500 million offering in 2013, plans to lift borrowings this fiscal year by 8%.
“Costs for us have increased in the recent past and therefore there is insignificant savings in borrowing from abroad,” Agarwal said. “We are going to rely on domestic markets as we would be able to manage it better.”
Alternatives are on offer. The Reserve Bank of India (RBI) earlier this month sought to boost international demand for rupee debt by issuing offshore sale guidelines for companies. International Finance Corp., a World Bank funding arm, was the first to offer such notes in 2013 and Indian Railway Finance Corp. is exploring a sale.
RBI governor Raghuram Rajan has warned that borrowing in dollars was like playing “Russian roulette.” This period of slow global growth is “particularly dangerous” as countries will attempt to divert growth from others, he said on 11 June in Bangladesh.
Fed effect
Since taking office in September 2013, Rajan has built up India’s foreign-exchange reserves by about 29% to a record $354 billion in May. India saw the rupee weaken to a record low in 2013 after the Federal Reserve first signalled it would start withdrawing its unprecedented monetary stimulus. The US central bank signalled on Wednesday that a rate increase this year is still on the cards.
“As we get closer to the first fed rate hike in nine years, markets are getting nervous,” said Kaushik Rudra, the Singapore-based head of credit and rates research at Standard Chartered. “This, combined with fairly poor secondary market liquidity, means risk appetite is very poor right now.”
Not everyone is staying home. Power Finance Corp., a state- run lender to utilities, has hired bankers for a possible dollar debt sale while Axis Bank Ltd is meeting investors in Europe this week for an offering abroad.
The extra yield on greenback-denominated notes from India over treasuries has jumped about 14 basis points to 261 in the past month. Global investors have pulled $471 million from Indian bonds this quarter, the only Asian country barring Thailand to see outflows. The rupee fell 2% in the period.
“Ultimately, markets will do well only if fundamentals are right,” said A.S. Thiyaga Rajan, Singapore-based senior managing director at Aquarius Investment Advisors Pte, which hasn’t bought Indian bonds in the past three months. “I believe the administration is trying to make fundamental changes and it will take time.” Bloomberg
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