Cost of insuring Indian bonds in foreign markets sees sharp drop (2024)

The cost of insuring against bond default is gauged by credit default swaps (CDS).

Besides, the increase in foreign investment limit in government bonds has meant that in the overseas market, a sovereign credit default swap (CDS) has developed and is getting traded daily. So far, State Bank of India’s (SBI) CDS was taken as the quasi-sovereign. Typically, a sovereign CDS spread develops when a country issues bonds in the overseas markets. India is perhaps among only a handful of countries where a CDS spread has developed in the overseas market even when there is no overseas bonds by the government.

To be sure, the sovereign CDS spread first developed in December 2008, following the global credit crisis. However, the instrument remained dormant till October 2013. The regulators allowed foreign investors to directly buy in the domestic debt, including in government bonds, in September. Two months after that, in November, the sovereign CDS spread sprang back to life. Foreign investors can invest up to $30 billion in government debt. They have already exhausted 99.19% of this limit.

With foreign investors looking at the sovereign CDS spread, SBI’s CDS is no longer the benchmark to gauge foreign investors’ take on the country’s risk perception.

SBI’s CDS spread has narrowed from a high of 220 basis points (bps) six months ago to 161.08 bps now. One basis point is one-hundredth of a percentage point. The sovereign CDS in the same period has narrowed to 158.69 bps from 199.1 bps, Bloomberg data showed. CDS spreads widen as credit-worthiness declines, and narrow as credit-worthiness increases.

In December 2013, SBI’s spread was 344.8 bps and the sovereign’s spread was at 343.5 bps.

The contraction in SBI’s CDS spread is a sign of economic revival, said Goldman Sachs’ India chief economist Tushar Poddar last week in an interaction with the media. In a report dated 1 December, Goldman Sachs said India will grow faster than China in 2016.

Interestingly, CDS spreads on bonds of Reliance Industries Ltd are lower than the government’s sovereign spread, underlining the strong fundamentals of the firm. Exim Bank of India’s CDS spread is also slightly lower than the sovereign spread as Exim Bank provides development finance to other sovereigns and, thus, the bonds raised by the export promotion bank is considered almost risk-free, given the prestige of the country.

Reliance Industries’s CDS spread is at 152.56, down from 282.9 at its peak in the one-year period. In the last six months, its lowest point was at 145.8 bps.

There is a remarkable scaledown of risk perception in bonds of Tata Motors Ltd. From its February highs of 540.24 bps, the CDS spread has come down to 275.45 bps now.

Vedanta Resources Plc, listed in the UK but having operations in India, is the only outlier in the pack, with CDS of the firm remaining high for most part of last year. The cost of insuring against Vedanta’s bonds shot up to 479.66 bps on 29 September. It is now at 451.24 bps.

“The CDS spread is falling because of improved macroeconomic numbers, better fiscal and current account deficit numbers. Lower inflation and improving growth is reason enough for foreign investors to be bullish on India and Indian companies’ health," said the head of financial markets at a private sector bank. He did not want to be quoted as Indian banks don’t take positions in overseas CDS markets.

So far this year, on a net basis, foreign investors have invested $16.53 billion in Indian equities and $25.6 billion in Indian bonds. Goldman Sachs estimated that in 2015, apart from a bullish equities and debt markets, India could see an average $3 billion per month inflow in foreign direct investment, too.

The Goldman Sachs report mentioned the balance sheets of Indian firms are on the mend and once the government starts awarding contracts to local firms, cash flow will improve and they will be able to service debt. Indian banks, saddled with bad debt, will also see asset quality and investment activity improve, the report said.

Rating agency Moody’s on Monday said India’s sovereign bond rating could see an upgrade if the fiscal and inflation metrics improve. “The stable outlook on rating is based on our expectation growth will accelerate over the next two years, boosted by policies to increase investment and reduce macroeconomic imbalances," Moody’s said in its credit analysis report on India.

“India’s ‘Baa3’ government bond rating with a stable outlook reflects the strong growth potential of its large and diverse economy; balanced against persistent and high fiscal deficits, recurrent inflationary pressures as well as regulatory and infrastructure constraints on competitiveness," said Moody’s.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Published: 09 Dec 2014, 01:07 AM IST