ICICI Taps Bernanke's Rates as Local Borrowing Costs Surge: India Credit

India banks are selling the most dollar-denominated debt in at least a decade, taking advantage of near-zero U.S. benchmark rates after Reserve Bank of India Governor Duvvuri Subarrao raised borrowing costs six times.

ICICI Bank Ltd., the nation’s second-largest lender by assets, sold $1 billion of 5.75 percent, 10-year bonds yesterday that yield 325 basis points more than similar-maturity Treasuries, data compiled by Bloomberg show. The spread on its last sale of 2016 debt was 320 basis points. The offering adds to $6.6 billion raised overseas in 2010 by the nation’s banks, topping the $4.6 billion issued by Chinese lenders.

Subbarao’s rate increases have pushed government 10-year yields up 42 basis points to 8.01 percent this year, compared with 2.52 percent for Treasuries. India’s overseas bond-rush helped sustain a 21 percent increase in bank lending in the year through Oct. 22, even as the RBI sought to slow the fastest inflation after Argentina in the Group of 20 nations.

“India’s economic growth is high and this increases the financing needs for Indian banks and corporates,” Cornel Bruhin, a fund manager in Zurich at Clariden Leu AG, which manages $3.5 billion of emerging-market debt including that of Axis Bank Ltd. and ICICI, said in an interview yesterday. “The level of indebtedness is still relatively low and general investor demand for India debt is still very high.”

Widening Gap

The yield on India’s government notes due in 2020 rose 3 basis points yesterday, widening the gap to 548 basis points over Treasuries of similar maturity. The spread reached 567, or 5.67 percentage points, on Oct. 20, the widest since 2001, according to Bloomberg data. India’s wholesale-price index climbed 8.6 percent in September, while consumer prices rose 11.1 percent in Argentina and 1.1 percent in the U.S.

India’s government bonds returned 4.2 percent this year, the third-worst performance among 10 local-currency debt markets outside Japan, indexes compiled by HSBC Holdings Plc show. India plans to sell 110 billion rupees ($2.48 billion) of bonds due in 2017, 2020 and 2040 through an auction on Nov. 12, according to an e-mailed statement from the finance ministry yesterday.

India’s rupee weakened 0.4 percent to 44.385 per dollar yesterday, trimming its appreciation this year to 5 percent, according to data compiled by Bloomberg.

‘Concerted’ Actions

Subbarao said Nov. 2 that “concerted” policy actions by the central bank will help slow the inflation rate to 5.5 percent by March 31. He forecast India’s $1.3 trillion economy may expand 8.5 percent in the 12 months ending March 31, the fastest pace in three years.

India’s banks faced their worst cash crunch on record in the past month, prompting the RBI to buy back 83.5 billion rupees of government bonds on Nov. 4, the first such move since September 2009.

Lenders borrowed 1.2 trillion rupees of overnight loans from the central bank on Oct. 29, an all-time high, to meet cash shortages after investors pulled deposits to buy shares being issued by Coal India Ltd. in an initial public offering last month. Such borrowing averaged 532 billion rupees a day between Oct. 1 and Nov. 5, more than twice the amount in September, RBI data show.

Rates on three-month commercial paper sold by Indian companies almost doubled this year to 8.16 percent, following an 88 basis-point surge in October, according to Bloomberg data. U.S. three-month Treasury bills yielded 0.127 percent.

State Bank of India

Sales by ICICI’s larger competitor, State Bank of India, climbed to $3.2 billion from $897 million in 2009, Bloomberg data show. The Bank of Baroda Ltd. raised $1.28 billion over the same period, up from $61 million in 2009.

“This is an opportunistic move because of the tight liquidity onshore and relatively high cost of deposits onshore,” Christopher Leow, a fund manager in Singapore at CIMB-Principal Asset Management Ltd., which overseas more than $6 billion globally including Axis Bank and HDFC Bank Ltd, said in an interview yesterday. “This reflects a growing demand for dollar loans from Indian corporates.”

The cost to protect against losses on debt of State Bank of India, a government-controlled lender that is the nearest measure for sovereign debt, declined 3 basis points to 156.2 basis points on Nov. 5, the lowest since April 27, according to New York-based CMA’s data on credit-default swaps.

ICICI Swaps

Those tied to the debt of ICICI fell 10 basis points last week to 189, the lowest since Oct. 15, CMA data show. That compared with 42 for U.S. government debt.

The swaps typically rise as investor confidence deteriorates and fall as it improves. Credit-default contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The Fed and Chairman Ben S. Bernanke announced on Nov. 3 a plan to buy an additional $600 billion of Treasuries through June, expanding record stimulus in a bid to reduce unemployment and avert deflation. It spent $1.7 trillion through March 2010 in the first round of so-called quantitative easing.

“The Fed’s plan to purchase government bonds means investors in the U.S. have much less to buy,” Tetsuo Ishihara, a senior credit analyst in Tokyo at Mizuho Securities Co., an arm of Japan’s third-largest bank by market value, said in an interview yesterday. “At the same time, Indian banks need to raise funds as their economy is strong.”

U.S. President Barack Obama told business leaders in Mumbai on Nov. 6 that increased trade between India and the U.S. is a “win-win” proposition that would create jobs in both the countries. As part of Obama’s visit, Reliance Power Ltd. won a $5 billion line of credit from the U.S. Export-Import Bank to fund renewable energy and gas plants.