RBI's liquidity measures bring down top-rated corporate bond spreads

The yield contraction helped companies raise money and tide over the tight liquidity conditions they were facing after defaults by prominent NBFCs such as IL&FS and DHFL

The liquidity surplus in the system has brought down the corporate bond spreads, or the difference between corporate bond yields and equivalent maturity, substantially, and in some cases even below the pre-Covid level. The contraction in spreads was visible across all rating segments, except the lowest rated BBB- corporates, according to the data from the Reserve Bank of India (RBI) and Fixed Income Money Markets and Derivatives Association (FIMMDA). 

The yield contraction helped companies raise money and tide over the tight liquidity conditions they were facing after defaults by prominent non-banking financial companies (NBFCs) such as IL&FS and DHFL. However, bond dealers are cautioning that the yield contraction due to ample liquidity could be short lived as the bond market is not very deep in India and suspicion over lower-rated firms remains among investors.  

The yield contraction was most visible among top rated papers — AAA to AA. These firms did not have much problem in terms of liquidity anyway, and investors picked up whatever they offered at a cheaper rate. This is something that Monetary Policy Committee (MPC) member Jayanth Varma termed as ‘oligopolistic’. The real test of the measures could have been how the lowest-rated papers behaved. Even as there was spread contraction, but it was marginal.