Surging interest in India papers gives a boost to Re-Eurobond issuances

Mumbai: India's inclusion in global bond indices has not only spurred interest in the country's sovereign debt, but it has also spawned a booming proxy market for worldwide investors that want debt exposure to the planet's fastest-growing major economy.

According to data provided by UAE-based Cbonds, the total aggregate issuance of rupee eurobonds was at $2.54 billion in the first four months 2024, higher than $2 billion for the whole of 2023. Eurobonds are securities denominated in currencies that are different from the national currencies of the countries in which issuance takes place.

The quantum of aggregate rupee eurobond issuances so far in 2024 is the highest since 2018, when the figure was at $2.90 billion, the data showed.

Issuers of rupee eurobonds are primarily multilateral agencies, with recent placements including those by the Inter-American Development Bank, the Venezuela-based Corporacion Andina De Fomento, the European Bank for Reconstruction and Development and the Asian Infrastructure Investment Bank.

"The surge in issuance reflects global investors' growing interest in INR, buoyed by a favourable macro environment, strides toward fiscal consolidation, and a relatively stable currency. These INR denominated bonds are traded and settled abroad, thereby helping investors with smoother settlement bringing operational efficiency," Deepak Sood, senior partner and head, fixed income at Alpha Alternatives.

"Additionally, these bonds being outside the provisions of Indian withholding tax bolsters overall returns and appeal," he said.

For issuers of such bonds, the attraction comes from low-cost access to funds as the rupee exposure is converted to relatively cheap dollar funding amid sharply higher US interest rates. For global investors, the draw is exposure to relatively higher-yielding Indian fixed income without having to adhere to local registration and taxation norms that they say eat into returns.

ET had reported in early December that issuance of India-focused bonds by supranational agencies had picked up sharply after JP Morgan announced the inclusion of domestic bonds in its emerging market index.

"The yield spread between debt instruments in rupees and dollars has decreased significantly since the beginning of 2022 - this is a positive factor for the supply side of such securities. It is noteworthy that the main issuers of such securities are international development banks, which run operations in various currencies and thus try to hedge currency risks in their securities basket," wrote Kirill Andrianov and Maksim Zenkov, head of emerging markets and head of Indian fixed income, respectively, at Cbonds.

The upbeat view on India's growth story aside, tax considerations have played a large role in propelling foreign investors to rupee eurobonds instead of local government bonds.

From July 1, a uniform concessional 5% withholding tax on interest income from debt securities for FPIs was withdrawn. Subsequently, the rate was increased to around 10-20% based on tax treaties for each jurisdiction.