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India’s rating upgrade by Moody’s has not infused too much enthusiasm in the domestic bond markets but it would make it easier for companies to raise funds abroad. In the domestic markets, foreign investors have exhausted their limits in government and corporate bonds. On Wednesday, Moody’s said in a report on Indian companies that the cross-border bond maturities for the next three years for companies rated by it were manageable, even as cross-border issuance for such companies had exceeded the average of six years. Year-to-date, Moody’s-rated companies have raised $6.2 billion in bonds, while the average in the past six years was about $4.5 billion. According to market sources, year-to-date, Indian companies have raised a little more than $16 billion through bonds. Market watchers said another $2 billion would be raised by December, including Reliance Industries’ $800 million. Experts said in 2018, the fundraising could be more than $18 billion, as S&P and Fitch could also arrive at a positive decision about India. For all practical purposes, a rating upgrade by one global agency could increase the chances of other agencies not taking a negative decision. This is a perceived stability that a lot of foreign investors seek from a country. As a thumb rule, though, an investment decision is arrived at by considering the lowest of the ratings. Fitch and S&P still have near speculative grade ratings for the country. The perception about India’s top companies was hugely favourable in the overseas market, said bond dealers. And, the rule of thumb might not be always followed when investing in the papers of a top Indian company. “In the international market, a rating upgrade matters.
Overseas investors are happy to take a lower return if investment is perceived as a lower risk,” said Harihar Krishnamurthy, treasurer at First Rand Bank. According to a banker with a foreign bank, the standing of Indian papers in Asia, particularly in Japan and Singapore, were on a par with bonds issued by reputed companies from higher-rated countries. But investors in Europe and the US are still largely driven by the ratings yardstick. “The trick is to build the book in Asia and close the commitment even before the deal opens,” said the banker, requesting anonymity. The preferred instrument here is syndicated loans and not bonds, but it is a different case for top Indian companies. For example, Reliance Industries on Tuesday raised $800 million at 130 basis points over US treasuries, or at 3.667 per cent, setting a record for a BBB- company in Asia since the financial crisis. The pricing also came after the latest upgrade by Moody’s. But, the fundraising would be categorised as BBB- as the other two agencies have not upgraded their ratings and have also not indicated if there would be a rating revision anytime soon. Most Indian companies would face the same kind of headwinds and pricing they used to face before the rating upgrade. But the intensity would reduce a lot, said market observers. In corporate bonds, 96.70 per cent of the investment limit of $51 billion equivalent has been subscribed to by foreign investors. Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch, said the limit would be expanded as investors with rating mandate above BBB- would look to enter Indian markets. The investment limit in government bonds is Rs 1.9 lakh crore and it gets expanded in a phased manner. But the amount offered is far lower than demand. The domestic bond yields, though, are still driven by local domestic factors and not just the Moody’s upgrade because of the lack of space for foreigners. “Local bond yields would still be driven by hardcore economic factors such as economy and liquidity and what the Reserve Bank’s stance is on policy rate,” said Krishnamurthy. The yields on the 10-year bond closed at 6.96 per cent, lower than its Friday’s close of 7.05 per cent. After reaching nearly Rs 6 lakh crore after demonetisation, the banking system’s surplus liquidity is now a little over Rs 1 lakh crore. The lack of liquidity might push up yields in the coming days, especially as rising oil prices pose a risk to the fiscal deficit, warned bond dealers.