India’s ECB rejig: too little, too late
Easing rules on international borrowings is not nearly enough
India’s central bank is under pressure. The rupee has slumped to record lows against the dollar this month, while foreign exchange inflows have slumped.
The Reserve Bank of India has been pulling out all the stops to revive both.
This week, for example, it paved the way for international settlements in rupees, a move that may transform the rupee into a hard currency in the future. In early July, it also temporarily removed the cap on interest rates for banks to attract deposits from non-residents and eased rules around foreign investment in local currency bonds.
These measures are laudable — and may help stem the fall in the rupee, which has lost over 6% since the beginning of the year.
But there is one area where the RBI consistently fails to show its prowess — its rules on external commercial borrowings, or offshore debt, both loans and bonds, raised by Indian borrowers.
To ease inflows, RBI said on July 6 it will allow firms to raise $1.5bn each year without approval. The new limit is double the $750m allowed.
On the face of it, the relaxation seems generous, but it comes with a catch: it is open only until December 31, raising questions over how useful it will actually be.
There are only a handful of issuers that have the need or appetite to raise $1bn or more in offshore debt in one go.
Of the about $6bn raised so far by Indian issuers in public international bond markets in 2022, only two raised $750m or more each, Dealogic data shows. The duo includes the country’s largest private-sector company Reliance Industries, and Greenko Energy, one of the largest renewable energy firms.
It is not that issuers are not keen to diversify their funding sources and raise offshore debt. Often, the high swap costs make dollar debt untenable on absolute borrowing cost levels.
In some cases, where offshore borrowings are cheaper over local borrowings, they often get stuck in the quagmire of complex ECB rules. In 2019, the RBI attempted to reform the rules but ended up adding more layers of complexity in areas including the use of proceeds.
Pricing caps on ECB deals are another pain point. Also on July 6, the central bank raised the pricing limit by 100bp to 600bp — but only for investment grade rated companies.
By restricting the higher cap to IG-rated borrowers, the RBI has ended up creating more confusion: over whether the higher borrowing limit is also only for this class of borrowers.
While the central bank is expected to clarify the situation soon, the price cap relaxation still looks meaningless.
High grade issuers usually have good access to both local and offshore markets. Most of the time, they seal their dollar bonds well within the price caps.
Frequent issuers such as State Bank of India, which has been long expected to tap the dollar market after getting board approval for up to $2bn, have been changing tack. SBI, for instance, has tapped the local market more in 2022. Along with other state-owned banks, SBI is also preparing to tap the domestic additional tier one market soon.
Of course, a little nudge from RBI may push state-owned borrowers to dollars. But it is the high yield rated issuers that need more support, and have a bigger need to diversify their funding sources beyond the shallow rupee market.
Due to India’s Baa3/BBB-/BBB- rating, a majority of its companies are rated non-investment grade or junk globally, further emphasizing the need to relook at their funding needs.
Timing is crucial. For the best of Indian high yield names, global volatility has pushed bond spreads wider; their all-in funding costs are now in the high single digits or more levels. Even yields on bonds from well-regarded and investment grade rated firms, like Tata Group companies, are hitting the 6% levels.
It came as little surprise then when on Tuesday, ReNew Energy Global, India’s largest renewable energy firm by operational assets, said it was going to prepay its $525m 6.67% 2024 notes. A rupee-denominated amortizing project facility from a non-banking financial company has replaced the bond. ReNew is rated high yield.
ReNew became the first Indian renewable energy company to replace its offshore debt with local funds. The refinancing made sense, however, as it extended its debt maturity to 2027 and helped it slash costs by as much as 200bp.
Its refinancing tactic is a wake-up call for the RBI to review its stance on international fundraising by India Inc.
The central bank should allow more flexibility to issuers to choose their best funding options in line with market conditions. It can also help more by relaxing restrictions on tenors and use of proceeds.
The latest move is a good step, but to make it impactful, the RBI needs to think bigger. It’s time it goes back to the drawing board.