A time for consolidation

Outlook/ Corporate bonds

Yields on corporate bonds are expected to consolidate at last week's levels this week.

The non-statutory liquidity ratio (non-SLR) market could see some buying from mutual funds as they are expected to get investments from the maturity proceeds of Resurgent India Bond (RIB).

The yield differential between the best-rated five-year corporate bond and a corresponding maturity gilt, which was at around 75 basis points last week, could come off at the most by about five basis points

Mutual funds are expecting to corner a part of the $5.2 billion RIB proceeds.

Non-resident Indians stand to get substantially by way of tax benefits by investing in the fixed maturity plans of the mutual funds. This will, in turn, spur investment by mutual funds in the non-SLR market.

According to market players a substantial portion of the maturity proceeds of RIB are expected to come back into India as it makes eminent sense to create assets in rupees when the dollar is continuously depreciating. Further, there is no fear of the Indian rupee depreciating at least in the medium term.

How the yields have softened can be gauged by the fact that Power Finance Corporation (PFC) raised seven-year funds at 5.85 per cent a month back. Currently, this paper is being dealt in the secondary market at 5.50 per cent.

In view of the forthcoming review of the monetary and credit policy, corporates ar unlikely to tap the bond market in anticipation of softer interest rates. If the RBI cuts signal rates like bank rate or cash reserve ratio, they could raise resources cheaper.

The commercial paper market will continue to be dull. The best-rated corporates could raise 90-day money via commercial paper at around 4.75 per cent.