The corporate bond market is on a roll, finally. Data from the Securities and Exchange Board of India show a surge in trading volumes since the middle of December.
This has gone up to Rs 25,102 crore in December last year and Rs 24,609 crore till January 28 this year. Ashish Vaidya, executive vice president and head of interest-rate trading, HDFC Bank, said, “This is a cyclical movement. Typically, action is seen when prices of equities or debt are on the rise.” Given that interest rates have been falling and are expected to be benign for some time, bond prices are rising. And that has made them attractive for investors.
For instance, with money beginning to flow into bond funds in the last few months, mutual fund managers are looking at corporate bonds that will give them higher returns. Even traders have been quite aggressive in this market, especially in the papers of public sector undertakings (PSUs).
Between 2004 and 2008, when interest rates were on the rise, bond prices were falling. Also, the steep rise in the equities market made it more attractive for investors. Even from a company’s perspective, raising capital through the initial public offering (IPO) or external commercial borrowing (ECB) or the alternative investment market (AIM) route was not difficult. Now, many companies are looking at the bond route to meet their financial needs.
Since November last year, 69 companies (including PSUs and banks) have issued bonds worth Rs 64,271 crore, according to Bloomberg. The banking sector, which is in the process of raising its Tier-II capital, has also been quite aggressive. Some like Bank of Baroda and Bank of India have already raised capital through this route. At present, Oriental Bank of Commerce is in the process of doing so.
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What has helped them is the sharp fall in the rates from December. According to market sources, till mid-December, even large PSUs like Power Finance Corporation and Indian Oil Company were issuing bonds at 11.25 per cent. But in the next 15-20 day period, rates slipped to 8 per cent leading to a sharp surge in prices.
According to market experts, at present a 10-year AAA rated PSU paper’s yield is 9 per cent a year. For big private sector players like Reliance or Tatas, this yield is slightly higher by 50 basis points. For smaller players, it could be as high as 150 to 200 basis points more.
“Additionally, in the first week of January, provident funds, who invest in the Special Deposit Schemes (SDS) were paid interest of over Rs 15,000 crore. Some of this investible surplus would have got diverted to corporate bonds,” said Ashish Agarwal, executive director, A.K. Capital, a merchant banker for corporate debt.
Experts, however, feel corporate bond market in India has a long way to go. According to HDFC Bank’s Vaidya, while this trend could continue in a soft interest regime, there still needs to be a proper framework for corporate bonds that will deepen the market and make it more liquid. Though the limit for Foreign Institutional Investors have been increased to $15 billion, experts feel that steps like creating a platform for repo transactions in corporate bonds will help.