 "10-year bond yields rise, may become tough for banks to pass on rate cuts")
The spread between Indian government bond yields and their corporate counterparts is expected to widen in the second half of this year, as tight liquidity and increased borrowings will push investors to demand higher returns, analysts said.
"Many corporates and state-run companies that delayed borrowing will have to tap the market to fulfil their target, and with tightening liquidity conditions, yields on corporate papers are expected to see higher impact as compared to government debt," said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap.
The spread between government and corporate yields had dropped sharply in the previous quarter but has been rising since the beginning of this month.
For example, AAA-rated SIDBI sold three-year notes at a coupon of 7.75%, earlier in October, while the three-year government bond yield was at 7.33%. The spread between such papers was around 20 bps in September.
"Over the next 12-18 months, I see many arguments for an increase in spreads. It should be pre-dominantly driven by the confidence that corporate India has to expand balance sheets, which will lead to more funding needs," said Amit Tripathi, CIO-fixed income investments at Nippon Life.
Moreover, the current levels of bond yields are more attractive for companies, considering bank loan rates have also risen and require collateral, said market participants.
India's banking system liquidity deficit has jumped to 42-month high levels, and traders do not expect conditions to improve sharply over the rest of the year, meaning investors will start to look for higher yields.
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When overnight funding rates are more than 6%, it indicates tight liquidity, and in such times, investors will demand higher-than-prevailing yields, said Mandar Pitale, head of treasury at SBM Bank (India).
He added there could be good traction from at least the higher-rated issuers.
Meanwhile, traders also expect companies that had opted to raise funds in dollars to shift their focus to rupee-denominated debt as it could be cheaper to as refinance.
"A lot of companies had got cheap funds from external debt borrowing and that should be shifting to local market. The spreads should not be as flat as we saw in the first half and should rise as we move forward," Nippon Life's Tripathi said.
(Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)
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