Rupee Loan Rate Gap at Two-Year High Sends Borrowers Abroad: India Credit

The widest gap between local and dollar money-market rates in more than two years is driving Indian companies to borrow abroad.

Usha Martin Ltd., a maker of steel cables used in machinery and bridges, plans to raise $125 million in dollar-denominated loans, Chief Financial Officer A.K. Somani said in a Jan. 6 interview. GAIL India Ltd., the nation’s biggest natural gas transporter, expects approval from U.S. Export-Import Bank for a $100 million facility, Finance Director Raj Kumar Goel said. New Delhi-based GAIL may also borrow $500 million by March, he said.

“Dollar loans are definitely cheaper than rupee loans,” Goel said in a Jan. 12 interview. “Overseas loans suit us better rather than overseas bonds, as with loans we don’t have to draw down the amount immediately.”

The gap between the three-month London interbank offered rate, or Libor, and the India National Stock Exchange’s interbank offered rate jumped to 886 basis points yesterday, the widest since November 2008. Demand for funds is rising as India builds infrastructure to support an economy that expanded 8.9 percent in the quarter ended Sept. 30.

Indian companies borrowed $23.4 billion overseas in 2010, more than triple the amount in 2009, though less than the record $24.3 billion in 2007. Foreign-currency bond sales also more than tripled last year to $8.7 billion.

“There’s interest and appetite among Indian banks and corporates to borrow in the international capital markets because of the lower interest rates,” Nondas Nicolaides, a senior banking analyst at Moody’s Investors Service, said in a phone interview on Jan. 14 from Limassol, Cyprus. “The banks would be willing to lend to those companies which usually have foreign-currency earnings capacity as well.”

Policy Outlook

The Reserve Bank of India raised interest rates six times in 2010 as growth recovered. Policy makers are scheduled to meet Jan. 25 and will probably raise the benchmark repurchase rate by 25 basis points to 6.5 percent, according to 10 economists surveyed by Bloomberg News.

Union Bank of India, a Mumbai based state-owned lender, raised 160 million Swiss francs ($166 million) in its first sale of debt denominated in the currency, according to data compiled by Bloomberg.

Bank of Baroda, also based in Mumbai, plans to meet potential lenders for a $125 million three-year loan, according to a person close to the matter yesterday. BNP Paribas SA and Standard Chartered Plc are arranging talks in Singapore and Taipei on Jan. 20 to Jan. 21, the person said, asking not to be identified as the information is private.

Essar Energy Plc, India’s second-largest non-state refiner, plans to raise about $500 million though the sale of convertible bonds, two people with direct knowledge of the transaction said.

State Bank

Average Indian dollar bond yields dropped to 5.10 percent from a four-month high of 5.22 percent last month, HSBC Holdings Plc indexes show. That compares with five-year funding costs in rupees for top-rated borrowers of 9.05 percent, according to the Fixed Income Money Market and Derivatives Association of India, or FIMMDA.

State Bank of India, the country’s largest lender, raised its base lending rate 50 basis points to 8 percent on Jan. 3.

Mumbai-based State Bank is also the lead arranger for Usha Martin’s loans, which will have maturities of five and seven years, according to the Kolkata-based company.

The cost of protecting the debt of government-owned State Bank, which some investors perceive as a proxy for the nation, has risen 19 basis points this year to 179 basis points on Jan. 14. That’s 60 points below last year’s peak on May 25.

Credit swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Subbarao View

Elsewhere in Indian markets, the rupee fell for a third day, the longest stretch since November, as gold traders bought dollars. The currency traded 0.4 percent lower at 45.52 per dollar yesterday, according to data compiled by Bloomberg. It earlier touched 45.645, the lowest since Jan. 11.

“There was dollar demand from gold traders,” said Paresh Nayar, Mumbai-based head of currency and money markets at the Indian unit of FirstRand Ltd.

Central bank Governor Duvvuri Subbarao yesterday said inflation has caught up with India “sooner than other countries.” Speaking at an event in Mumbai, he pointed out a “surge” in inflation, and said the bank must balance price risks with supporting the economic recovery.

The wholesale-price index increased 8.43 percent last month from a year earlier, according to the commerce ministry on Jan. 14. The gauge gained 7.48 percent in November.

India’s government bonds dropped for a second day on speculation an increase in the retail price of gasoline will accelerate inflation. India’s three-year government bond yield of 7.76 percent compares with 12.8 percent in Brazil, 3.26 percent in China and 7.2 percent in Russia.

The yield on the most-traded 8.13 percent bond due September 2022 climbed two basis points to 8.21 percent yesterday, according to the central bank’s trading system.

“Both local liquidity and rates are tight,” said Ajay Mahajan, managing director at the Indian unit of UBS AG. “So the propensity to raise money offshore will be very high at the moment.”