India's SBI Raises $1.25bn From Overseas Bonds

India’s largest bank, State Bank of India, has raised $1.25 billion US dollar-denominated dual-tranche bond issued on Saturday at a coupon rate of 4 percent and above, a move many analysts see as a proxy attempt by the government to check another round of fall in the Rupee.

A significant fall in the Rupee’s exchange rate, a politically sensitive issue in India, can add ammunition to the opposition’s attacks on Prime Minister Narendra Modi’s BJP party in the upcoming general elections in April and May.

With crude prices starting climbing up again to cross $60 per barrel last week, the Indian currency has started witnessing another downward trend in valutation.

The announcement early this week by India’s central bank, the Reserve  Bank of India (RBI) on ‘New External Commercial Borrowing Framework’ under which it reduced the ECB maturity tenor, increased borrowing limits and removed qualification restrictions for companies wanting to borrow funds from abroad is also seen as a move in sync with the measures to keep the rupee value under check.

SBI’s dual tranche $1.25 billion bond issue carries a coupon rate of 4 percent for $400 million due in 2022 and 4.37 percent for $850 million, which will be due for repayment in 2024, considered high in the prevailing market conditions by financial market players.

The rupee on Friday depreciated 21 paise to 71.24 against dollar in the forex market, amid strengthening US dollar and rising crude prices, after remaining stable at around 69 in most of part of December and early part of this month.

“Since there is no concern on liquidity or any significant uptake in credit off take at this point, the move on the part of SBI to raise a large USD-denominated bond issue, that too at a coupon rate of 4 percent and above, which is considered high in the current market situation, raises a lot of questions,” R Guha, CFO at Akzo Nobel India, told Arabian Business.

Going forward, there could be more such proxy moves by the government to keep the rupee value under check in the run up to the general elections, he said.

Generally it is RBI which intervenes in the forex market to check free fall or strengthening of rupee.

“It seems the Government may be using proxies such as SBI to prop up Rupee valuation in anticipation of a further fall in its value on account of rising crude prices and other factors,” a senior official at a forex trading firm, who did not wish to be identified, said.

The SBI official spokesman was not available for comments.

In most of the second half 2018, the Indian currency was in a downward spiral, falling to a record low of 74.48 on October 11, last year.

The rupee was pushed to lower levels by a sustained rally in crude price, touching a high of $86 a barrel, prior to re-imposition of US economic sanctions against Iran in the first week of November last year.

Oil industry analysts said crude prices are set to see a steady rise in the coming months on account of curtailed productions by major producers such as Saudi Arabia and Russia, in addition to the ‘operational dynamics’ of the oil trading market.

“Crude prices could firm up to a level of $75 to $80 a barrel, with $80 being the upper limit in the next few months,” T Muralidhar, an independent petroleum sector consultant, told Arabian Business.

The expected price rise may not be on account of the demand factor but would be because of other industry reasons, Muralidhar said.

With retail prices of petrol and diesel already rising in India in the last 8 to 10 days, on the back of firming up of global crude prices, any further increase in crude prices will push up India’s oil import bills substantially, bringing the country’s fiscal and current account deficit under further strain.

This could bring Rupee valuation under tremendous pressure, leading to a possible repeat of what was seen in the July-October 2018 period, market analysts said.

“There is a general trend of fall in rupee in the pre-election period. It happened in 2014 also, and is expected this year as well in the run up to the general elections in April-May. The uptrend in crude prices could add to it this time around,” Vijay Kedia, MD of Kedia Stock and Commodity Research, told Arabian Business.

M R Rajaram, an independent financial consultant, however, said, the SBI’s move (on the foreign currency bond issue) could be to fund a particular lending proposal with it without disturbing its existing liquidity position.

The Indian currency registered a decline of about 15 percent last year against the dollar, making it one of the worst performing currencies among those of emerging economies.