Indian banks are likely to jump into the bond market as surging global inflation and a surprise rise in interest rates spur concerns about the outlook for borrowing costs.
Banks may rush to raise money for mortgage books and long-term infrastructure projects before rates climb higher, said Anand Dama, a senior analyst at financial services research firm Emkay Global. The Reserve Bank of India on May 4 surprised markets by raising its benchmark rates at an unscheduled review of its monetary policy settings.
"The fund raising will be mainly on [the] debt side as banks will try to raise long-term debt and lock it at lower rates," Dama told S&P Global Market Intelligence. The banks will likely use the proceeds to fund their mortgage book and long-term infrastructure projects, the analyst added.
Rates to rise further
Reversing its ultraloose policy settings, the Reserve Bank of India raised the rate at which it lends overnight money to banks to 4.4%. The central bank had cut the rate to a record low of 4.0% in May 2020 to support the pandemic-battered economy. More hikes are expected as global central banks tighten policy to tamp down inflationary pressures.
"The scales have tilted in favor of front-loaded monetary tightening," Priyanka Kishore, head of India and Southeast Asia, macro and investor services at Oxford Economics, wrote in a May 6 note. Kishore expects the central bank to hike rates again in June and follow through with further tightening in August and October. The Indian central bank may raise rates faster if inflationary pressures increase, Kishore added.
India's GDP growth is projected at 8.2% in 2022, according to the IMF. It also noted that real GDP contracted 6.6% in 2020 before growing 8.9% in 2021.
Banks pursue debt offerings
Several Indian banks have announced plans to raise funds in the bond market, seeking to take advantage of still-low interest rates before they rise further as the central bank embarks on a policy tightening cycle.
State Bank of India, the largest bank in the country in terms of assets, said May 10 it plans to raise up to $2 billion via bonds. HDFC Bank Ltd., India's largest private-sector bank by assets, approved a 500 billion rupee bond issuance plan in April. In March, Punjab National Bank also approved raising capital via the issuance of Basel III-compliant Tier 1 bonds totaling 55 billion rupees and Tier 2 bonds totaling 65 billion rupees.
Apart from the bigger ticket issuances, other banks have announced fund raising plans. In March, Indian Overseas Bank raised 6.65 billion rupees via an offering of Tier 2 bonds, while The Karnataka Bank Ltd. said it would raise up to 3 billion rupees via Basel III-compliant bonds. The Jammu and Kashmir Bank Ltd. will raise 10 billion rupees in bonds on a private placement basis. Earlier in January, The Federal Bank Ltd. said it will raise funds by issuing Tier 2 bonds amounting to 7 billion rupees.
Recovery spurs credit growth
Economic activity in India has recovered and investments by both the corporate sector and the government are expected to rise. Bank credit rose 11.2% year over year as of April 22, compared with 5.3% in the prior-year period, according to Reserve Bank of India data. That marked the first double-digit growth in credit since August 2019.
"Banks planning to raise funds either in local or overseas markets need it for refinancing purposes and to fund future credit growth, which is expected to pick up in line with economic upturn in India," said Nikita Anand, analyst at S&P Global Ratings. "We will expect banks to be cautious in this market given interest rates are likely to rise, which will make fund raising costlier," Anand said.
Some banks had to call off their bond issuances early in 2022 due to the market volatility following Russia's invasion of Ukraine. "I suspect that would have resulted in muted fund raising earlier this year," Anand said.
Indian banks' aggregate common equity Tier 1 ratio stood at 86.8% as of the end of March 2021, according to a Dec. 28, 2021, report from the Reserve Bank of India. The ratio for most large private sector banks is above 15%, significantly higher than the minimum capital to risk-weighted asset ratio of 9% required by the central bank.
"Most banks are well placed on equity capital, however, banks may look to raise debt capital to fund the balance sheet growth," said Nitin Aggarwal, analyst for Motilal Oswal Securities.
As of May 20, US$1 was equivalent to 77.81 Indian rupees.