“With the announcement of sanctions, the forward rate agreement – the overnight indexed swap spread – how expensive or cheap it will be for banks to borrow in the interbank market relative to the risk-free rate – has widened along with the spread of non-financial commercial letter,” the Reserve Bank of India said (reserve Bank of India) report good.
Since the start of the Russo-Ukraine war, the benchmark US Treasury yield rose 114 basis points, raising overall funding costs around the world.
While international investors are seen seeking the safety of dollar-backed assets, a perceived dollar shortfall has already begun to appear in currency futures markets, with the risk premium falling to decades low.
Corporate bond spreads in the US and emerging markets despite some moderation in June 2022 reflecting increased risk aversion and the impact of monetary tightening, said the RBI FSR report, as valuations reflect an increasingly weak economic outlook.
Around mid-June, the 10-year US Treasury touched around 3.50%, later correcting to about 45 basis points. The local benchmark paper lost around 13 basis points during the same period.
However, last year the US Treasury benchmark was hovering roughly in the 1-1.5% range, tempting many local companies to borrow abroad. and are among others with outstanding debts to international investors.
“The focus has been on debt creation among non-financial corporates, increasing dollar-denominated loans in emerging market economies (EMEs) and the role of NBFIs,” the RBI report said.
“Overall, the simultaneous monetary tightening amid heightened geopolitical tensions poses a number of financial stability risks,” it added.
Those risks include the sale of financial assets, rising interest rates, and market volatility. Investors have expressed doubts about the ability to repay the loan.
Some Indian newspapers have given returns of up to 20 per cent in the offshore market in recent times.
“The potential erosion of risk appetite and tighter financial conditions could lead to an increase in debt-servicing costs when their ability to generate foreign exchange for service loans is more constrained,” the FSR report said.
However, there is a silver lining. Even as the Chinese high-yield market is dotted with defaults, Indian high-yield papers appear to be a destination for high-risk global investors.