Regulatory Push - A Silver Lining for the Primary Corporate Bond Market

India Ratings and Research (Ind-Ra) anticipates activities in the primary corporate bond market will be majorly guided by the regulatory push in an environment of elevated bond yields and tepid demand for credits. The issuances in the primary bond market have been trending downwards. Ind-Ra believes this is mostly on account of a sharp rise in bond yields, and overall tepid demand for non-working capital financing. Contrarily, issuances in the short-term money market (both commercial paper (CP) and certificate of deposit) have risen backed by a surge in working capital demand.

CP Issuances to Remain Stable: Ind-Ra believes the surge in CP issuances is driven by 1) disruption in working capital cycle owing to the implementation of the Goods and Services Tax regime; 2) pickup in economic activities; 3) rise in input cost prices; and 4) seasonal demand. The agency believes disruption in the working capital cycle is unlikely to resolve any sooner. On the other hand, surge in money market yields have reduced incentive for CP issuances than bank lending. However, normalisation of system level liquidity would stoke issuances for certificate of deposits by banks. Ind-Ra expects the overall issuances in the primary money market segment to remain steady in the foreseeable future.

Mutual Fund Debt AUM Major Driver for Corporate Bond Curve: The agency believes a large build-up in debt mutual fund assets under management has been a major driver for non-government bond curves so far. However, with sharp rise in interest rate, stickiness of the funds is a major hurdle in addition to drying up of banking sector liquidity. Thus, Ind-Ra believes mutual fund assets under management (debt) to be the key determinant for non-government bonds' yield curves, given the limiting attractiveness for foreign portfolio investors.

Yield for Non-PSUs to Stabilse: Ind-Ra believes relatively lesser issuances by the non-public sector undertakings (non-PSUs) will alleviate pressure on the non-PSU corporate bond yield curve. Moreover, higher tenure bond issuances by high rated PSUs is likely to exert pressure on the PSU yield curve.

Powered by Capital Market - Live News