HDFC Bank, India’s largest private-sector lender, had the first-mover advantage after the RBI announced a special swap window earlier this month, and raised $750 million through a five-year dollar bond issue last week at a competitive rate. Several other lenders were preparing to follow, encouraged by the lower funding cost support from the central bank’s facility.
However, investors adjusted their return expectations after sensing a potential rise in supply from Indian banks. The expectation that lenders would aggressively tap the market, combined with the benefit of the RBI’s subsidised swap window, led investors to demand higher spreads.
As a result, spreads on recent dollar bond issuances by Indian borrowers have steadily widened. HDFC Bank raised $750 million through five-year bonds at 90 basis points over the corresponding US Treasury yield. Power Finance Corporation (PFC) followed with a $300 million issue at 105 basis points over the yield of the 5-year US Treasury, while Axis Bank raised $300 million at 110 basis points. A source aware of the deals said Axis Bank had initially planned to raise between $500 million and $1 billion but reduced the issuance size.
The final coupon on HDFC Bank’s bond was 5.067 per cent, marking its tightest-ever spread on a dollar bond issue. PFC’s coupon was 5.32 per cent, while Axis Bank’s was 5.35 per cent. “One reason for a relatively weak response to the PFC and Axis Bank issues was that investors may be overestimating the amount of supply they expect from India,” said a person aware of the developments.
“The perception is that there will be a flood of issuances, whereas the reality is that Indian banks are likely to be very sensible about tapping the market,” the source said.
The additional coupon premium sought by investors was higher than what banks had expected, prompting lenders to reassess their plans. Sources said banks are unlikely to rush into the market unless pricing improves.
“Dollar bond issuances require significant preparation, and because the window is relatively short, only banks that have already done the groundwork are likely to come to the market. There are two or three banks preparing themselves, and a few more could potentially issue within this window, but it is not the flood of issuances that investors seem to be pricing in,” the source added.
State Bank of India (SBI) and Bank of Baroda are among the lenders expected to tap the market soon with sizeable issuances.
The planned borrowings follow the RBI’s recent measures to attract foreign capital and support the rupee. The concessional swap window allows banks to access lower-cost dollar funding at a time when credit growth continues to outpace deposit mobilisation, easing funding pressures and helping narrow the credit-deposit gap.
Under the RBI facility, the central bank will undertake swaps at a fixed rate of 1.5 per cent per annum, compounded semi-annually, for eligible overseas foreign currency borrowing (OFCB) with a minimum maturity of three years.
Analysts estimate that banks could raise $5-8 billion through the OFCB window in FY27. Another $10-12 billion could be mobilised through the external commercial borrowing (ECB) and foreign currency convertible bond (FCCB) swap window, taking total fund mobilisation through the ECB/OFCB route to $15-20 billion.
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