Will S&P's outlook upgrade lead to higher forex borrowing

Rating agency S&P has upped its outlook on India to stable from negative. Usually this means yields on Indian corporate bonds in the secondary market should move lower and Indian companies should be able to raise forex loans more cheaply.

Will this S&P action lead to a flood of external commercial borrowings (ECBs) or forex loans?

In an interview with CNBC-TV18, Anant Narayan, MD & Regional Head of Fixed Income and Currency Trading for South Asia for Stanchart and Gunit Chaddha, MD & CEO, Deutsche Bank discuss the significance of this latest upgrade in ratings.

Below is a verbatim transcript of the interview. Also watch the

Q: Did you see at all a fall in the yields of already trading corporate paper in the market?

Narayan: The yields have been coming off over the last few days. Ever since the Budget, in fact, we have seen a contraction in the spreads and it has also been across the globe not just for India. But going forward, medium-term, this is definitely positive news. From a pure investor perspective, the comfort that one would have in investing in Indian paper would naturally go up given all the three major rating agencies S&P, Moody’s and Fitch now have a stable outlook on India. So the chances of a downgrade at the moment are pretty slim.

The ability and the comfort in holding on to a long-term Indian paper specially the high grade ones obviously would increase overtime now.

Q: What is your own sense of this S&P outlook being revised? Do you think it makes offshore money suddenly cheaper than onshore money? Could this trigger a flood of ECBs into India?

Chadha: I don’t think this event in itself is going to be the turning point to get more Indian companies and Indian banks actual paper overseas. It is a combination of many events—the global stabilization, the volatility haven’t come off, this S&P event certainly helps. Yes, I do believe that Indian companies will approach the global capital markets insight and I do believe Indian banks will take the advantage of spreads having come off by 20-30 bps over the last few months.

But this event in itself may tighten spreads marginally but it is not going to be the defining thing.

Q: What is the difference between onshore and offshore money for AAA manufacturing company at this point in time?

Chadha: Depending on the company and depending on the tenure you are talking about, I think for longer-term money there would be compelling advantage to go offshore, especially if you want to raise it in size. I also think that many Indian banks would be running into their prudential limits in terms of company and group exposure limit, especially on the infrastructure side. So companies would like to make sure that they keep some powder dry on the domestic side while they go global.

So yes, I do expect high investments. I do expect investment grade issuances coming out in Indian banks and Indian companies.

Q: One of the things that has made sovereigns and even for that matter the credit market still slightly not terribly attractive has been this entire Greek episode and the fact that it could be quite contagion. Assuming that it gets sorted out in the months to come, do you think that sometime in maybe the first half and perhaps more clearly in the second half you could see Indian paper becoming very attractive? Do you see something like that 2007 kind of ECB flows at least something of that kind happening in 2010 at all?

Narayan: Clearly, the markets have improved over the last few weeks and months. There was a time in the middle of the crisis when it became very difficult for corporates to raise money overseas, onshore funding was clearly cheaper. That gap has narrowed. Of course, a lot of it depends on a name-to-name basis.

But clearly that gap has narrowed to a large extent now so much so that there is not much of a difference for the average corporate onshore or offshore.Going forward, what one has to remember is that Indian spreads typically quote anywhere tighter than a normal BBB- anywhere else in the world.

There has been appetite for Indian paper plus there is supply on the anvil for Indian paper as well especially amongst the high grade ones whether it is banks, whether it is manufacturing companies, whether it is for acquisitions overseas and so on and so forth. So we have to keep that in mind.

Having said that, the events of the last few days have clearly been a positive. The S&P outlook change is clearly icing on the cake. Things like Greece and PIGS (Portugal, Ireland, Greece and Spain) and so on and so forth obviously are things that one needs to worry about. Hopefully the impact on India even if there was a recurrence of issues there would be low given that the size of our debt specially sovereign debt overseas is quite low bulk of it is a domestic debt. So those issues shouldn't rub off onto us.

The FII flows into Indian equities do have an appreciating force on the rupee. But in the past four years, if you looked at the huge jump that the rupee takes in leaps and bounces towards that 39-mark as and when it had happened two years ago, it was largely because loans became a big factor. Do you think that that is on the anvil at all sometime in 2010?

Chadha: Our view is more a consensus view that we will see rupee tighten and we will see rupee tighten in the 4-5% band per annum. We do think that the flows will help to tighten that but to reach the level of 39 which you are suggesting is probably still a few years away.

Q: I am not suggesting 39. What I am suggesting is a quantum change in the Dollar Rupee?

Chadha: Yes, we think that the change will be more graduated and the change will reflect to 4-5% but what you will find is that that appreciation of the rupee will probably be sustained over the next few years barring any unforeseen circumstance and the only unforeseen circumstance, which we can see right now, is crude went way out of whack but otherwise we think that it is very clearly a Deutsche Bank’s consensus view on the Dollar Rupee side.

Q: What is your in-house view or your own personal view on where you see the dollar by June 30 or December 31?

Narayan: Stanchart’s view for December 31 Dollar Rupee is 42. We have been maintaining that for a while and the S&P news yesterday obviously helps buttress that particular case of ours. The point you made about will ECBs be the fresh flow of dollars coming into the system, which will lead the next wave of rupee appreciation—it is tough to say. There is a possibility that local rates might go up given the monetary situation and given the growth and so on and so forth at which point of time maybe corporates would see value and going through ECBs rather than local borrowings.

Having said that, given the experience that we had previously of rupee moving from 40-50, I would think a lot of corporates even if they do chose to go through an ECB route would probably hedge the Dollar Rupee exposure at least a part of it to which extent. We shouldn’t see unbridled appreciation purely on account of ECB inflows.