Slowest start for corp bonds in 5 years

As RBI seems unlikely to cut the repo rate issuances might continue to be slow, due to higher borrowing cost

Corporate bond issuance through the private placement route hit a five-year low in the first quarter of the current financial year, as the cost of borrowing continues to be high amid a slowing economy and loan demand remains sluggish.

The Reserve Bank of India (RBI) is not expected to cut interest rates anytime soon. A rate cut would boost such issuances but experts think this might not happen till 2015.

Data from the Securities and Exchange Board of India show corporate bond issuances through private placement were Rs 50,971 crore in the first quarter of the current financial year, compared with Rs 1,10,785 crore during the corresponding period of last year.

The lowest was after the financial crisis of late 2008,  when it touched Rs 46,287 crore in the first quarter of 2009-10.

“In three to six months from now, interest rates might start moderately inching south, due to which borrowing costs might be lower,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

The broad expectation in RBI’s bimonthly monetary policy review to be detailed on Tuesday is that the repo rate (at which it lends to banks) shall remain unchanged at eight per cent. This is despite a lower print for the Consumer Price Index (CPI)-based inflation for June. The latter rose 7.31 per cent from a year earlier in June, compared with a rise of 8.28 per cent in May. RBI aims to keep the CPI-based inflation at eight per cent by January 2015, in line with the Urjit Patel committee suggestions.

  According to issue arrangers, the current cost of borrowing for a 10-year paper by an AAA-rated public sector undertaking is around 9.4 per cent. The cost for private sector issuers is higher.

In the past couple of months, liquidity has tightened and that has also kept the cost of borrowing elevated. “Even if liquidity improves, the cost of borrowing will not fall below eight per cent, the repo rate. For it to come down, there should be a decline in bond yields or in the repo rate or both,” said Dhawal Dalal, executive vice-president and head of fixed income at DSP BlackRock Mutual Fund.

Recently, RBI issued a new 10-year bond, due to which the yield on 10-year paper fell. But that has not helped to bring down borrowing cost. "This is because the rest of the curve continues to be high", said Dalal.