It is a tough year ahead for private sector companies that wish to raise debt in 2012-13, as there are concerns that large government borrowings may crowd out the market and compel them to offer higher yields to attract investors.
In 2012-13, the government is slated to raise Rs 5.69 lakh crore via bond sale against Rs 5.1 lakh crore borrowed in the previous year. “Clearly, there will be pressure on liquidity and bond yields in the wake of huge government borrowing,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
As a result, corporate bond issuers will need to offer higher coupon rates. “There will be no incentive to buy corporate bonds if you get sovereign papers at higher rates.” Manglunia said he expected the corporate bond yields spreads over government security of similar maturity to be 80-120 basis points during 2012-13.
Yields on the 10-year benchmark government bond closed at 8.57 per cent on Friday after touching 8.63 per cent earlier in the week, when the borrowing calendar for April-September 2012 was released. On Tueday government said it would borrow Rs 3.7 lakh crore or 65 per cent of the total borrowing in the first six months of the financial year.
“Typically, corporate bond issuances in the first half are lower but yields will definitely feel the pinch in the second half as demand increases,” said K P Jeevan, head-debt markets, Karvy Stock Broking. While gilt yields may rise up to nine per cent, the spreads on corporate bonds are bound to widen on tight liquidity, he added.
According to data from the Securities and Exchange Board of India, corporate bonds worth Rs 2.4 lakh crore were issued via private placement between April 2011 and February 2012. Data showed issuances had picked up in the last two months.
Market participants said the debt market would be heavily dependent on liquidity and monetary easing measures of the Reserve Bank of India (RBI). It is expected that RBI would infuse liquidity through open market operations. The markets also expect RBI to cut policy rates this financial year.
“Corporates may come to the market once rates cool off,” said Manglunia.
The central bank is scheduled to announce the annual monetary and credit policy on April 17.
RBI had cut banks’ cash reserve ratio (CRR) by 125 basis points in two tranches since January 2012 to improve liquidity conditions, whereas the policy rate has been kept unchanged since October 2011, citing upward risks to inflation.
Despite the CRR reduction and open market operations, the liquidity deficit had increased to close to Rs 2 lakh crore, as against RBI’s comfort level of one per cent of net demand and time liabilities, in the last fortnight of 2011-12.
