The largest foreign currency borrowing last month by Reliance Industries Limited, the largest by an Indian company, is a record that could remain unmatched for some time as a rise in the cost of dollar debt is imminent.
For the first time since December 2018, the US federal government is set to raise its benchmark interest rate to temper inflation that has hit a multi-decade high.
Chairman Jerome Powell said Jan. 26 that the Federal Reserve would likely raise interest rates as early as March and said it planned to halt its bond purchases during that month to calm inflation.
“The committee is of the view to raise the federal funds rate at the March meeting assuming conditions are appropriate to do so,” Powell said, citing the statement from the central bank‘s Federal Open Market Committee.
Widespread expectations are that there will be several rounds of rate hikes, what analysts and investors call the “normalization” of the US dollar. Some have said the federal funds rate could increase eightfold over the next two years.
With each rise in the benchmark US federal funds rate, the greenback, the world’s most traded currency, will strengthen and individual peer currencies will appear to weaken.
“The dollar will strengthen sustainably because two or three interest rate hikes won’t necessarily do the job of inflation. Remember there is a structural problem here and tactical action would not help,” said Dhananjay Sinha, managing director of Mumbai-based consultancy JM Financial.
The Indian rupee is currently trading at 74.94 per US dollar. It could drop to 77 this year, Sinha said.
Demand for debt from abroad is high among Indian businesses as they build and expand their capabilities to benefit from the economic growth prospects of the world’s second most populous nation.
India’s economy is expected to accelerate by more than 9% this year, a pace that is the fastest among the world’s largest economies.
Indian companies are estimated to have raised over $20 billion in the past year. With the equation on the US rate, the benchmark for foreign bonds, reversing this year, investment bankers are unsure if and when the previous year’s figure will be breached.
Impending interest rate increases in the United States, the world’s largest economy, will cause capital to flow into that country’s currency, which is considered the safest mode of investment. To obtain the dollar, investors and borrowers will have to pay a higher price.
In the fray
Indian companies, including state-owned power producer NTPC Limited, Shriram Transport Finance and ReNew Power, are in advanced stages of plans to issue dollar-denominated debt. As many as $9bn (£6.6bn) in issuance is expected over the next six months.
Oil-telecom conglomerate Reliance Industries raised $4 billion in January in the largest-ever foreign-currency bond sale by an Indian company.
Reliance’s number received offers worth almost three times as much. The company raised $1.5 billion at 2.875% per annum for a 10-year term, $1.75 billion at 3.625% interest per annum for a 30-year bond and $750 million at 3.75% for bonds with a maturity of 40 years.
“This transaction is significant in several ways – [it’s the] India’s largest ever foreign currency bond issue, [with the] the tightest implied credit spread ever on the respective US Treasury on each of the 3 tranches by an Indian company.
“It had the lowest coupon for benchmark 30- and 40-year issues from a private sector BBB firm in Asia outside Japan, and [the] first-ever 40-year installment by a BBB private sector company from Asia ex-Japan,” Reliance Industries said in a statement.
Metals and mining giant Vedanta Limited is eyeing a bond offering of up to $1 billion out of Mumbai International Airports Ltd, likely half of Vedanta’s offering.
Indian borrowers are facing the backlash of the so-called “normalization” of the US dollar, as central banks around the world, since the outbreak of the Covid-19 pandemic outbreak in March 2020, have kept abundant liquidity in the banking system.
This strategy has reached an inflation feeding point in the United States, but is still underway in India to help spur economic acceleration. India’s economic growth at the end of the fiscal year ending March 2021 was the slowest in four decades.
Further interest rate hikes and a possible reduction in the Fed’s bond-selling plan would follow as needed, the Fed’s Powell said, as the central bank aims to bring inflation back from the current multi-decade high. to its 2% target.
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