Rupee-linked bonds may not find much favour with foreign investors

Possibility of US rate hike, hedging costs to act as dampener

At a time when foreign investors are selling Indian papers, rupee-linked bonds issued overseas by Indian companies may not see good appetite from foreign investors. 

Experts also say that hedging costs make these bonds less attractive.

The Reserve Bank of India (RBI) came up with draft guidelines for these bonds on Tuesday. According to the guidelines, the pricing can't be 500 basis points above the yield on government bonds of corresponding maturity. Besides that investors of rupee-linked bonds issued overseas can hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market. 

“These bonds will sail smoothly in an environment where there is good demand and appetite for Indian bonds. Currently, foreign institutional investors (FIIs) are showing a bit of disinterest in Indian papers due to possibility of a US Fed rate hike this year. When this phase is over and bond yields come down, then we can get a much clearer picture,” said Badrish Kulhalli, head of fixed income at HDFC Life.

RBI has said Indian corporates, who are eligible to raise External Commercial Borrowings (ECBs), are permitted to issue rupee-linked bonds overseas. 

The central bank also said that banks incorporated in India will not have access to these bonds. 

“The advantage for these bonds is that investors can buy them internationally without coming to India. But the eligible issuers are those who can also raise ECB due to which issuances will be limited,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. 

Manglunia added that these bonds are less attractive because of the hedging cost.

So far this month FIIs have been net sellers in debt to the tune of Rs 3,842 crore. There are concerns on the street that the US Fed may start hiking interest rates sooner than expected and if that happens then there will be outflows in debt as well as equity from emerging markets and India will not be an exception.