Through the Ukraine war, a litmus test for the global financial system, the cost of insuring potential defaults has risen more slowly in Mumbai than in some competing money hubs, although a few emerging markets in Southeast Asia have fared better.
India’s 5-year CDS (Credit Default Swap), a gauge for investment risk or sovereign credit perception, rose 13.80% since February 21. The war began on February 24. The increase in risk perception is smaller than those recorded in Russia, Germany, Argentina, the United Kingdom and Hong Kong, showed Bloomberg data compiled by ETIG. Banks from China fared worse.
“Confidence in investment-grade Indian names generally remains high,” said Ananth Narayan, associate professor at S P Jain Institute of Management and Research. “This widening, however, is marginal compared to the movement in, say, European high-yield markets. Credit spreads on India foreign currency debt have widened marginally this year given the global risk-off environment since the conflict in Ukraine broke out.”
CDS yields have gone up for three Indian banks – State Bank of India, ICICI Bank and Bank of India. The cost of covering default risk went up by 14.16-15.04% for those three lenders that represent Indian banks in the offshore derivative markets.
During the same period, China Construction CDS yielded 26% higher. Even a global biggie like BNP Paribas with over $2 trillion asset size has seen its CDS rising 7.5%.
The five-year contract of ICICI Bank’s CDS, which acts as a shield against likely default on outstanding debt securities by an issuer, yielded 121.53 versus 105.74 on February 21.
This means, an overseas investor would pay 121.53 basis points or cents to buy an insurance against every $100 investment in ICICI dollar-denominated bonds. If the issuer defaults, the investor’s loss would be covered.
Surprisingly, SBI’s one-year contracts on CDS have dropped by 4.17% reflecting investor confidence despite the odds. However, the five-contract is more popular with investors.
“The CDS spreads have widened on the back of global risk aversion triggered by the Ukraine crisis,” said Hemant Mishr, founder and CIO at SCUBECapital, Singapore. “This, coupled with the higher US rates, will mean credit spread on bonds and CDS spreads will continue to remain tight. Spreads of European banks with strong business linkages and exposure to Russia will remain under pressure.”
India’s current account deficit, or the excess of imports over exports, was at a risk of further widening when the global crude oil prices soared to $139 per barrel.
However, prices slipped back to $100 amid expectations of a diplomatic solution to the Ukraine crisis.
Last Thursday, the US Federal Reserves raised interest rates by a quarter percentage point for the first time since 2018. The move was in line with the central bank’s stated stance last year.