Budget 2014-15 and Indian Debt Markets

An Unintended Brake in the Indian Bond Market - India Ratings
Issuers to flock to ‘cheap’ Foreign Currency Borrowing: The Budget’s proposal to liberalise the ADR/GDR regime to allow issuance of depository receipts on all securities will encourage Indian bond issuers to raise more foreign currency bonds, says India Ratings & Research (Ind-Ra). The proposal to allow international settlement of Indian debt securities would further ease out the process. Indian debt issuers, who have been increasingly lured by foreign currency debt, may re-evaluate the option of tapping domestic bond markets over foreign capital markets.
Particularly, for an issuer with a high quality credit profile, the foreign currency bond may appear more lucrative on an un-hedged basis than raising debt capital from the domestic debt market.
‘Un-hedged’ Pricing the Driving Force: These foreign currency borrowings, if resorted to without hedging for currency and interest rate risks, provide significant savings to finance costs of companies in the short term. However, the finance cost gains are likely to be more limited if the foreign currency debt is hedged for the related risks.
Possible impact on Indian Bond Market: The Indian bond market has shown encouraging though moderate growth post 2010 (refer: appendix). This coincided with the introduction of base-rate by RBI from July 2010. Arguably, corporates with high credit quality tapped the domestic debt capital market to raise funds at rates lower than the base rate. As such, the banks would not have been able to lend at interest rates below the base rate.
It is these high quality issuers who are the most likely candidates for tapping the ADR/GDR route to raise debt funds from abroad. Ind-Ra believes that despite the constraints posed by the RBI’s external commercial borrowing guidelines a significant debt volume could flow out of Indian debt markets.
(Source: Manager - Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company)