RBI's rate cut makes meagre impact on corporate bonds

However, govt bond yields dropped sharply by nearly 20 basis points

The Reserve Bank of India (RBI)'s sharp rate cut earlier this week has failed to make an impact on the corporate bond market.

Yields have barely moved and there have not been much of primary issuances. The secondary market yields on AAA-rated paper, considered the safest, have fallen by a meagre two to four basis points (bps) in tenures like 10 and five years.

RBI reduced the repo rate, at which banks borrow from it, by 50 bps to 6.75 per cent. After which, government bond yields dropped nearly 20 bps.

“Yields have not come down sharply in corporate bonds because there have not been many trades. Issuers are taking a wait-and-watch approach for raising bonds because they would like to raise funds at a much lower level after the rate cut. They are waiting for yields to go down further,” said Ajay Manglunia, senior vice-president at Edelweiss Securities.

Investors have also become cautious after Amtek Auto defaulted on Rs 800 crore of bond repayments last month. A State Bank of India executive said the effect of the concerns on this default still weigh on those dealing in corporate bonds.

Dealers feel the rate cut's impact on government bonds has not played out fully

Issuance of short-term instruments like commercial paper have picked up after the rate cut but corporate bonds are yet to see activity. It is also learnt that in the recent past Foreign Portfolio Investors (FPIs) have become cautious in corporate bonds after the Amtek Auto default and this has also contributed to lower activity in corporate debt.

Experts believe that with the recent enhancement in the government securities and State Development Loans (SDL) investment limits for FPIs, trading by them in corporate bonds may not be much.