Mumbai: Some overseas investors, whose enthusiasm for purchasing Indian sovereign debt is sapped by the procedures associated with the exercise, have found a novel instrument to tap into the credit market in the world’s fastest-expanding major economy: Supranational bonds.
Issuers of these instruments include entities such as the European Bank for Reconstruction and Development, International Finance Corp, and the Inter-American Development Bank. Investors include major global players such as Capital Group Cos, Bank of New York Mellon Corp, Mizuho Financial Group and Union Investment Luxembourg, among others, Bloomberg data showed. The issuance of India-focused bonds in this category that government-owned, or supranational, entities use to raise funds totalled $5.5 billion in 2023, according to Bloomberg data. Volumes have more than doubled over the past year, market veterans said.
“Increase in these overseas issuances is driven by offshore investors seeking INR fixed income and foreign exchange exposure as a proxy to buying G-secs (government securities) via the FPI (foreign portfolio investment) route, without having to contend with local operational and taxation related aspects,” said Siddharth Bachhawat, head-markets at Barclays India.
Data provided to ET by UAE-based financial market data vendor Cbonds showed the increase in the outstanding amount of supranational bonds during the end of placement was $2.96 billion so far in 2023, compared with last year. These bond transactions are arranged for issuers by major international banks.
Some of the bonds are listed on exchanges around the world, including Mumbai, Luxembourg, London, Dusseldorf, Frankfurt and Berlin.
Where Are the Gains?
For issuers, which include multilateral agencies, the draw from issuing supranational bonds in rupees is a way of converting that exposure to cheap dollar funding at a time when funding costs in the American currency have climbed sharply while the Indian unit has remained remarkably stable.
Accounting for a swap transaction that is used to hedge the exchange rate risk, the conversion of the rupee funds to dollar funds is the same as or cheaper than the Secured Overnight Financing Rate (SOFR) which is the global benchmark for loans and derivatives – including swaps – denominated in the US dollar, market players said.
When all legs of the transactions are concluded, the issuers get relatively cheap dollar funds while the investors get much-desired exposure to Indian fixed-income instruments.
“Demand for these issuances is expected to pick up further going into 2024 as global investors increase their India exposure in the run-up to index inclusion. To that extent index-related FPI inflows into G-secs next year may be a tad lower than currently anticipated, ” Bachhawat said.
Sovereign Bonds
The sharp pick-up in Sovereign, Supranational and Agency (SSA) bond issuances comes at a time when Indian government bonds are being included in global bond indices, with JP Morgan having added the country to its emerging markets bond benchmark. However, other bond indices, such as the Bloomberg Global Aggregate Index, are yet to follow suit, with market sources saying that many investors had cited operational hurdles in the traditional route for investing in Indian sovereign bonds.
