Indian banks’ offshore dollar bond issuances stalled in September following the rush in August, as the Reserve Bank of India’s FCNR(B) swap window closed and on rising US Treasury yields increased funding costs.

Banks raised $850 million through offshore dollar bonds in September, down 89.5% from $8.1 billion in August, a 91bps analysis shows. No new issue had been recorded by October 13. The tracker covers deals captured since June, and is not a market tally. 

Source: 91bps analysis, based on data from banks, BSE and NSE.

FCNR(B) Inflows Temper Fresh Borrowing
The August surge preceded the RBI’s August 31 deadline for eligible inflows under its concessional dollar-rupee swap window for FCNR(B) deposits, which helped banks manage currency risk. The window attracted $132.98 billion by end-August, provisional RBI data show, including $74.9 billion after the August 14 deadline announcement.

Those inflows may reduce near-term overseas borrowing while banks deploy existing foreign-currency funds, although the effect will vary by lender.

The deadline may also have pulled fundraising forward, though it did not necessarily drive every issue. Separate RBI swap arrangements for eligible overseas borrowings remained available through December 31.

Higher Cost of Dollar Borrowing
The US Treasury market has become a more expensive starting point for Indian banks issuing dollar bonds. The five-year Treasury yield rose to 5.00% on October 13 from 4.55% on September 1, an increase of 45 basis points. The 10-year yield climbed to 5.21% from 4.79% over the same period, a rise of 42 basis points, according to US Treasury data.

The three-year yield also increased to 4.90% on October 13 from 4.46% on September 1, a rise of 44 basis points. These are the benchmark yields before adding the issuer-specific credit spread demanded by investors.

The all-in cost of a dollar bond therefore depends on both the Treasury yield and the spread over that benchmark. Even if a bank secures a relatively tight spread, a higher underlying Treasury yield can leave it paying more in coupon or yield terms than it would have earlier.

ICICI Bank Illustrates the Spread Comparison
ICICI Bank’s successive five-year dollar bond issues provide a useful comparison of pricing across the fundraising cycle. The bank’s $1 billion five-year notes in July were priced at 100 basis points over US Treasuries. Its subsequent $750 million five-year issue in August was priced at 105 basis points over Treasuries, compared with initial guidance of 130 basis points.

The five-basis-point difference between the two final spreads is modest, and the deals were priced under different market conditions. It nevertheless shows that the later issue carried a wider spread than the July transaction, even as the bank tightened the spread from its initial August guidance.

The broader funding cost also reflects the movement in the underlying Treasury benchmark. A comparison of final spreads alone cannot capture the full change in borrowing costs when Treasury yields have moved substantially between pricing dates.

September Deals Saw Higher Coupons
September’s two tracked deals carried coupons of 5.791% for RBL Bank and 6.112% for Bank of Maharashtra, averaging about 5.95%.

Source: 91bps analysis, based on data from banks, BSE and NSE.

Investor Demand Remains, But Pricing Matters
State Bank of India’s $500 million issue drew $2.46 billion of orders and RBL Bank’s $350 million issue more than $2.2 billion, according to the media reports.

But issuers may need more attractive pricing. Yes Bank withdrew a planned $500 million debut in August after investors sought about 200 basis points over Treasuries, versus a 170-180 basis-point fair-value estimate.

Domestic conditions also tightened after September’s slowdown. The RBI raised its repo rate 25 basis points to 5.50% on October 7, then announced 250 billion rupees of bond sales and a higher daily cash-reserve maintenance requirement on October 9.

Pipeline Suggests Issuance May Resume
Punjab National Bank is considering a debut five-year bond of at least $500 million, potentially rising to $1 billion, after approving a programme of up to $1.5 billion. Bank of India has held investor meetings for a planned $1 billion programme; Federal Bank, UCO Bank, and Canara Bank also have fundraising plans in the tracker.

The board-approved pipeline totals about $3.5 billion, excluding one undisclosed amount, but represents capacity rather than committed issuance.

For now, higher benchmark yields and undeployed foreign-currency funds have raised the hurdle for new deals.