Indian bonds see historic tightening of credit spreads amidst rating upgrade

Spreads between Indian bonds trading abroad and their benchmarks are at their narrowest ever, reflecting robust overseas interest in the world's fastest-expanding major economy that also saw a rating upgrade last week.

Credit spreads on outstanding Indian bonds have shrunk further – and faster - after S&P upgraded New Delhi's sovereign rating for the first time since subprime mortgages fueled the global financial crisis two decades ago.

"Credit spreads, especially for investment-grade Indian paper, have come down and are at levels never seen before,” said the head of debt capital markets at a UK based bank. “This is also partly because the supply of Indian paper has come down this year as issuers are wary of global uncertainties. But the fact is these are the best credit spreads enjoyed by Indian companies for a long time."


Bankers said lower credit spreads on Indian bonds indicate wider acceptability and cheaper funding costs abroad.

The sovereign-backed Exim Bank had raised $1 billion through a 10-year bond sale in January this year. The bond was priced at 100 basis points above the 10-year US benchmark. The instrument is trading at 71 basis points above the 10-year US bond now.

One basis point is 0.01 percentage point.

Private-sector companies have also fared equally well. Reliance Industries’ bond due in 2032 is currently trading at 63 basis points above the 10 year US treasury, the tightest since it was issued in 2022. The company had raised $1.5 billion and 120 basis points above the 10 year US treasury in 2022.

Pratik Shah, head financial services, EY, said India's rating upgrade to BBB last week has further strengthened the attractiveness of Indian paper abroad.

'Best' Credit Quality

"Credit quality of large Indian companies is probably at best ever. Their debt to equity is at near all-time best, so the chances of a credit event from India are very low,” said Shah. “Then there are other factors like economic growth. Real GDP growth of India over the last four years has outpaced its peers."

Bankers said weaker spreads indicate lower cost of borrowings for Indian companies through the overseas bond market. However, cheaper rupee funds and competitive overseas loan rates mean that companies would not want to spend time and money in finding investors to buy their bonds.

"A 10-year dollar loan for an investment-grade company out of India comes to about 5.40% currently, which is a good 30 to 40 basis points below the 5.7% 10-year bond rate for Indian companies currently,” said the head of debt capital markets at a US- based bank. “Rupee funds are available at cheaper rates, considering the currency risk and hedging costs. So, despite the spreads being so narrow, it does not mean companies will rush to the bond market."

With most Indian companies having limited overseas payments, going to the dollar bond market is also a big decision.

This year, for instance, after a strong start in January that predates the inauguration of the latest Donald Trump presidency, issuances from India have dried up. In January Exim, IIFL Finance ($325 million), Tata Capital ($400 mln) and Vedanta Resources ($1.1 bln) raised dollar funds in one of the busiest weeks for Indian issuers in overseas markets.

But global trade uncertainties, US tariff hikes and India-Pakistan conflict have kept Indian issuers out of the market.