No negative impact of extra govt borrowings

India Inc is not afraid of being crowded out of the corporate bond market despite the government’s announcement of extra Rs 40,000 crore of borrowings in this financial year.

In fact, the arrangers are more bullish on corporate bond issuances in the last quarter of 2012 financial year on account of the measures that the Reserve Bank of India (RBI) is expected to take to ease the liquidity situation.

“I believe the domestic corporate bond issuances will pick up in the last quarter of the financial year,” said Nirav Dalal, president and managing director of debt capital markets, YES Bank. “Corporates, especially the AAA rated ones, have not got rates in this financial year that are as good as they are today. The additional government borrowing announcement has not had a negative impact on the corporate bond yields in the last 4-5 days.”

The yields for AAA-rated companies have eased by 40-50 basis points in the last one month. Yields on corporate bonds ranged between 9.5 per cent and 9.8 per cent for the most part of 2011.

The pause in the monetary policy stance by the Reserve Bank of India has helped the yields on government securities. Consequently, the yields on corporate bonds have cooled off and market participants expect more liquidity enhancing measures to be taken up by the regulator.

“RBI will continue infusing liquidity into the system by way of bond purchases via open market operations (OMO). There is also a strong possibility of a cut in the repo rate and cash reserve ratio by the regulator as it will prevent disruption in the corporate bond market arising out of excessive government borrowing,” said N S Venkatesh, treasury head, IDBI Bank.

The stance of the regulator is more accommodative now, he added.

The yields on 10-year AAA-rated corporate bonds had declined to 9.24 per cent in mid-December 2011. But just a day before the announcement of increased borrowing by the government, corporate bond yields increased to 9.45 per cent.

However, the yields fell sharply to 9.32 per cent on Monday after RBI governor D Subbarao recently said that it was time to reverse the monetary policy stance, hinting at trimming down of interest rates. RBI has also announced another round of bond purchase via OMO this week, through which it will purchase government bonds worth Rs 12,000 crore on January 6.

The regulator has purchased bonds worth Rs 32,000 crore till now through OMO since November.

The Prime Minister’s Economic Advisory Council also said that the fiscal deficit will not be higher by more than 1 per cent of the GDP over the budgeted level. Most market participants expect the yields to be 9 per cent-9.25 per cent by January end.

The firms that frequently tap the domestic bond market said that extra borrowings by the government may put some upward pressure on the yields. But they appeared nonchalant.

“If a company wants funds immediately, it will not wait for the yields to come off. Only those companies not sure of their future inflows will be cautious about long-term liabilities,” said Satnam Singh, chairman and managing director, Power Finance Corporation (PFC).

Fixed-income experts also said that while the yields may not come off substantially very soon, the companies may look to raise funds via bonds in tranches. “The only thing that can happen is that they may not raise the full amount required by them. This will help the firms to meet their business requirements and at the same time will prevent them from locking themselves in higher coupons,” said Ajay Manglunia, fixed income head, Edelweiss Financial Services. Also, with reversal of RBI stance, the investment environment will improve and the firms will start taking action and move away from the wait-and-watch status.

Some arrangers also said that raising funds in the current financial year is easier because the government may be looking to borrow more in the next financial year as there will be a need give fiscal stimulus to boost the economy. The government has already announced raised additional borrowing of Rs 92,872 crore for the current financial year.

A few market participants also said that some states running a surplus budget may park funds in the treasury bills of the central government, thereby reducing the bond sale via OMO. However, some bankers negated the idea. “Although, there are few states that run budget surpluses, they will need to deploy these before the end of this financial and may even look to borrow,” said Venkatesh of IDBI Bank.