The head of fixed income at a domestic mutual fund said public sector fund-raising may have contributed to the uptick.
"The supply of public sector papers has been huge. It may be driven by the government's fiscal constraints because of which there is a nudge towards borrowing through public sector companies. There has also been an interest from funds that are flush with liquidity, as there is more comfort with investing money into public sector papers," he said.
This comfort with investing in government-backed entities has helped these units borrow at significantly lower rates than usual, according to another fund manager.
Funding costs, elsewhere, have been on the rise after the Infrastructure Leasing & Financial Services (IL&FS) defaulted on its obligations in the latter half of 2018. The non-banking financial companies (NBFC) segment has been affected in particular.
A May 15 report published by Bank of America-Merrill Lynch titled ‘Liquidity crunch: Darkest before the dawn?’ said conditions may improve by September. Reserve Bank of India Governor Shaktikanta Das has been looking to ease the strain by injecting liquidity through open market operations (OMOs), which make more money available to borrowers. The Monetary Policy Committee (MPC), which is responsible for deciding on interest rates, is also expected to reduce the cost of borrowing. This is in contrast to a hike of 50 basis points (bps) in 2018.
“While Governor Das's OMOs have cooled markets, defusing the real impact of the end-2018 liquidty crunch is taking time. So, what's changing? The RBI MPC is set to cut rates by 75-100 bps on a benign inflation outlook in 2019 in reversing 2018's 50 bp hike. We see the next cut on June 6 with May inflation tracking a low 3.2 per cent,” the report authored by India Economists Indranil Sen Gupta and Aastha Gudwani said.