"We expect cross-border bond issues from both Indian non-financial firms and financial institutions to increase through to 2015, as an improved economic outlook for the country has increased investor appetite for Indian credits, and as regulatory changes make it easier for Indian companies to borrow in foreign currency," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.
Moody's report says that increased investor appetite for Indian credits has resulted in the credit spreads on foreign currency denominated bonds issued by Indian companies tightening more than the spreads on foreign currency bonds across Asia between January and August 2014. The tighter spreads allow more Indian companies to issue foreign currency bonds that comply with regulations set by the Reserve Bank of India.
"In addition, more companies will tap the international markets to fund their growth and investments because the Indian government has relaxed certain regulations, such as slashing the withholding tax on interest payments to international investors, and raising the amount of guarantees that Indian entities can provide for foreign currency debt issued by their overseas subsidiaries," adds Halan.
Moody's report points out that the interest rates on foreign currency bonds are lower than those on rupee-denominated bonds, but the cost of hedging exchange-rate risk makes it more expensive for Indian entities to borrow in foreign currency.
It therefore makes sense only for companies with natural hedges against currency fluctuations to issue bonds in foreign currency.
Nevertheless, if the cost of hedging falls as the value of the rupee stabilizes, more Indian companies will be able to access the international capital markets.
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Moody's report further points out that cross-border bond issues by non-financial companies for the seven months from January-July 2014 reached $11.2 billion, surpassing the total $10.2 billion issued in 2013.
Three sectors -oil and gas, metals and mining, and telecommunications -issued 67% and 76% of the foreign currency bonds from Indian non-financial corporates in 2013 and 2014, respectively.
Moody's expects oil and gas and metals and mining companies to continue driving the increase in issuance, because such firms have a natural hedge against exchange-rate risk and do not need to swap their foreign currency borrowings into local currency.
Moody's also expects an increase in issuance from pharmaceutical and information technology and business process outsourcing companies, because such firms derive a large part of their revenues from exports, which are typically denominated in US dollars; providing them a natural hedge against currency fluctuations for their US dollar-denominated debt.
Moody's report says issuance from infrastructure companies will also increase, given their large funding needs.
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