The banking system is awash with liquidity, having generated a surplus of more than Rs 1 trillion for quite some time now. Bond yields also have fallen as the Reserve Bank of India (RBI) has slashed the repo rate by 110 basis points since February, and is expected to cut rates further.
But the biggest reason could be that corporates having outstanding long-term borrowing of Rs 100 crore must borrow a quarter of their incremental funding need from the bond market, as mandated by the Securities Exchange Board of India (Sebi). What is helping these issuers is that the interest rates have fallen substantially, more than 100 basis points in the case of companies with good credit rating.
Till August this calendar, the issuances reached Rs 5.45 trillion, including those issued by non-banking financial companies (NBFCs), other private corporates, and public sector units. In the same period last year, the issuances were Rs 3.93 trillion.
This is an increase of 38.7 per cent.
Considering the trend, the issuances would likely cross 2017’s record of Rs 7 trillion. But that doesn’t mean that there is no cause for concern and that the bond market has become healthy.
“The bump-up in headline bond issuances number is encouraging, but that was restricted to few large entities including PSUs. Sustainability will depend on incremental rate transmission in the banking sector and improvement in overall credit environment, especially cash flow point of view,” said Soumyajit Niyogi, associate director at India Ratings and Research.
Recently, RBI Deputy Governor B P Kanungo warned that the market was pushing out issuers with lower rating. This was paradoxical because in five years, demand for bonds would outstrip the supply, Kanungo said.
But foreign portfolio investors
(FPI) have reduced their holding in corporate bonds. According to the latest data, FPIs have utilised 67.57 per cent of their investable limit of Rs 3.03 trillion in corporate bonds. The debt utilisation was 76.8 per cent a year ago, but the investible limit was also less at Rs 2.67 trillion. But it is not that the FPIs are in a full-fledged sell-off mode.
“FPIs have been net purchasers in debt this year, cumulative amount being $4.2 billion year to date. Since April, FPIs have been consistent net purchasers in debt,” said Joydeep Sen, analyst at Phillip Capital.
But FPIs have been a net seller in equities, which in turn is putting pressure on the rupee. A weak rupee, though, is a good entry point for foreign investors provided they expect the local currency to strengthen going forward.
According to Sen, short-term bonds are a “good place to be in now,” for foreign investors. The one-year residual maturity AAA-rated bonds are available at about 6.9 per cent yield levels, while the three-year maturity bonds AAA rated are available at about 7.35 per cent.