Corporate bonds to touch 8.5 trillion next fiscal, may grow at

Domestic rating agency Icra today said corporate bond issuance is likely to grow by 20-22 per cent in the financial year 2017-18, with gross issuance rising to Rs 8.5 trillion.
"Benefiting from finer pricing in the bond markets, we expect the year-on-year growth of corporate bonds to remain substantial at 20-22 per cent in FY18. In absolute terms, the gross corporate bond issuance is expected to increase to Rs 8.5 trillion in FY18 from an estimated Rs 7.1 trillion in FY17," ICRA's group head (financial sector ratings) Karthik Srinivasan, told reporters here in a webinar.
He, however, said the gross bond issuance through government securities (G-sec), state development loans (SDL), UDAY bonds and municipal debt will remain stagnant at Rs 10.7 trillion in FY18.

"Although the 10-year g-sec yield has reverted to the level seen before the note ban, SDL yields are now 20 basis points higher than the level recorded in the auction on November 8, 2016, following the announcement in mid-January 2017 of the exclusion of most states from utilising National Small Savings Fund (NSSF) inflows to fund their fiscal deficits," Srinivasan said.
The agency expects bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to g-sec.
Srinivasan said the gross dated borrowings of the government are expected to remain flat at Rs 5.8 trillion in FY18, as indicated in the Union Budget.

Icra estimates the gross market borrowings of the state governments to rise by 22 per cent from Rs 3.7 trillion in FY17 to Rs 4.5 trillion in FY18, on account of larger fiscal deficits, a spike in debt repayment from FY18 onwards and the exclusion of most states from investing in the NSSF from April 1, 2016.

"While the impact of the NSSF modification would be neutral in terms of aggregate bond issuance, higher supply of SDL would push up their yields, while simultaneously reducing the same for g-sec," Srinivasan said.
The report said bond yields have undergone significant volatility since the note ban was announced.

"The measures to absorb excess liquidity, first the
temporary CRR hike, and later, the increase in the MSS ceiling, helped to stabilise bond yields," the report said.
With the Monetary Policy Committee (MPC) of the RBI, not only refraining from cutting rates in two consecutive policies, but also changing the policy stance from accommodative to neutral, the 10-year g-sec yield has reverted to the level seen before the note ban.
Srinivasan said despite the hawkish stance of the policy document, the MPC members' verbal comments emphasised that the policy stance is flexible.
This suggests that one last rate cut of 25 basis points to bring the repo rate to 6 per cent should not be ruled out, given the stance that real interest rates may need to be around 125-175 basis points, although the likelihood of further easing appears low, he said.

"A rate cut would dampen bond yields, as well as foreign institutional investors' (FII's) interest in Indian debt, particularly in the light of the expected rate hikes by the US Federal Reserve," he said.
The rating agency said banks interest in investing in bonds is expected to remain high, given subdued demand from the private sector for bank credit, in light of sluggish capital spending and less attractive bank lending rates.
"While we expect bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to g-sec," he said.