Some Indian firms are turning to floating-rate bonds to attract investors and manage borrowing costs at a time when expectations of rate hikes have pushed up yields on conventional fixed-rate debt, making buyers wary of locking in lower rates.
Coupons for floating-rate bonds are priced at a spread over three-month Treasury bill yields and reset quarterly. When rate hikes are expected, these bonds turn more attractive to both issuers and investors – companies can borrow at a lower initial cost, while investors benefit from returns that rise over time.
Four non-banking finance companies, ICICI Home Finance , Tata Capital, Mahindra & Mahindra Financial Services and HDB Financial Services, plan to raise about ₹8,550 crore ($887.74 million) this week through the sale of floating-rate bonds with a three-year maturity, merchant bankers said.
These companies have traditionally relied on fixed-rate bonds for their funding requirements. The four companies did not reply to a Reuters request for comment.
Venkatakrishnan Srinivasan, founder and managing partner of debt advisory firm Rockfort Fincap, cited the volatile interest-rate environment for the rising interest in such bonds, and said several issuers have been struggling to raise targeted amounts through fixed-rate issuances.
Bets that the Reserve Bank of India will raise interest rates in 2026 have strengthened, with inflation expected to rise due to persistently high oil prices from the Iran war.
India’s April annual wholesale price index inflation jumped to its highest level in three and a half years, while overnight index swap rates have surged.
The one-year swap is now pricing in at least 100 basis points of hikes over the next 12 months, possibly from August, lifting fixed-rate yields.
Yield pickup
Currently, spreads on AAA-rated floating-rate debt are in the 193–210 bp range over the T-bills, implying a yield of about 7.35 per cent. This is roughly 30–40 bps lower than the comparable fixed-rate bonds.
“If an asset manager fully hedges the floating rate bond, the all-in yield (for the investor) is closer to 8.85 per cent, compared with around 8.25 per cent on a conventional fixed-rate bond. On a hedged basis, it makes a lot of sense for asset managers to add these papers,” said Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India).
Investors can use the swap market to convert floating returns into fixed ones.
From the issuer’s perspective, they are “getting good size”, Bafna said, referring to a larger quantum of funds, and added that their incremental cost of funds is lower.