Floating-Rate Bond Sales Quadruple on India's Rate-Cut Outlook

  • Piramal Enterprises, Ceat among issuers of $879 million debt
  • Firms borrowing in hope of benefits from lower RBI rates

Sales of floating-rate bonds in India have almost quadrupled in 2015 as issuers bet central bank Governor Raghuram Rajan isn’t done cutting interest rates.

Billionaire Ajay Piramal’s Piramal Enterprises Ltd. and tire maker Ceat Ltd. are among companies that sold 58.7 billion rupees ($879 million) of debt with coupons linked to money-market and lending rates, up from 15.8 billion rupees in 2014, data compiled by Bloomberg show. Tata Power Co., India’s second-largest private electricity producer, plans to raise 5 billion rupees through such an offering.

Rajan kept the door open for further easing at a Dec. 1 policy review, prompting Citigroup Inc. to forecast he could act right after the federal budget, typically in February. Companies have turned to floaters as commercial lenders have yet to fully pass on the Reserve Bank of India’s 125-basis point reduction in benchmark rates this year, according to IDBI Federal Life Insurance Co.

“Firms are borrowing in the format that will give them the benefit of lower interest rates in the future,” said Sandeep Bagla, a Mumbai-based associate director at Trust Capital Services India Pvt., this year’s second-biggest arranger of rupee notes. “Floaters are popular right now and this trend is likely to stay for some time.”

Rajan left the repurchase rate at 6.75 percent at a Dec. 1 review while saying that monetary policy remains accommodative and he “will use the space for further” easing, “when available.” The RBI will have room to cut the repo rate by 25-50 basis points in the financial year starting April 1, economists at Kotak Mahindra Bank Ltd. wrote in a Dec. 4 report.

Even as the central bank has lowered borrowing costs the most since 2009, Indian lenders have been reluctant to pass on the easing as they seek to protect profits amid a surge in bad loans. State Bank of India, the nation’s largest lender, has cut its base rate by 70 basis points in 2015 to 9.3 percent.

Maithon Power Ltd., a joint venture company between Tata Power and Damodar Valley Corp., raised 5 billion rupees through notes linked to HDFC Bank Ltd.’s base rate on Nov. 30, while Varun Beverages Ltd., based in Noida, near New Delhi, on Dec. 1 issued 2 billion rupees of securities tied to SBI’s lending rate.

“We expect companies to use floaters to raise funds till there is an expectation that interest rates will come down further and till previous policy rate cuts are fully transmitted,” said Aneesh Srivastava, Mumbai-based chief investment officer at IDBI Federal.

Yields Jump

Increasing odds that the U.S. will raise interest rates as early as next week has damped sentiment for investors in Indian bonds. Foreign holdings of rupee-denominated sovereign and corporate debt fell 46.9 billion rupees in November, the most since May. That contributed to the 15-basis point jump in the benchmark 10-year yield, the biggest since June. The yield on similar-maturity AAA-rated corporate notes rose 10 basis points to 8.29 percent.

Overseas ownership has fallen further this month as futures contracts show a 78 percent chance the Federal Reserve will raise rates at its Dec. 15-16 meeting. The benchmark 10-year government bond yield was steady in Mumbai on Wednesday, after climbing four basis points Tuesday to 7.80 percent, its highest close since Sept. 7. It is down just six basis points this year.

“Issuers don’t want to get tied to fixed-rate structures given the current high yields in the market,” said Trust Capital’s Bagla. “Despite the monetary easing, bond yields haven’t fallen by the same magnitude, giving issuers greater conviction that borrowing costs for them will fall further.”

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