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In the quarter ending September, corporate bond issuances have dried significantly, following the Reserve Bank of India (RBI)’s liquidity-tightening measures announced in July. In the quarter ended June, companies raised Rs 1.11 lakh crore by way of private placement of bonds, according to data from the Securities and Exchange Board of India; in the second quarter, the amount raised through issuances fell about 50 per cent, said issue arrangers.
On July 15, RBI had announced a host of measures to tighten liquidity and raise short-term rates to arrest the volatility in the rupee. Following this, short-term rates rose. This had a spillover effect on long-term rates, too, owing to which corporate bond issuances dried up. Earlier, Power Finance Corporation had considered raising Rs 1,500-2,000 crore through a private placement of bonds, with a maturity period of three-five years. However, the issue didn’t hit the market due to the high borrowing costs and tight liquidity, said issue arrangers. They added if the company would have tapped the corporate bond market through private placement, the coupon rate for the bonds would have exceeded 10 per cent.
“Unless liquidity is released further, corporate bond issuances will not pick up. Most of these companies are going for bank loans,” said Ramesh Kumar, senior vice-president (debt), Asit C Mehta Investment Intermediates.
In the mid-quarter review of the monetary policy on Friday, RBI had raised the repo rate by 25 basis points to 7.5 per cent. This dampened the sentiment further. “With an increase in the repo rate, the outlook for the interest rate environment has become bearish. In a bearish interest-rate scenario, people tend to be a bit cautious. Once the interest rate outlook becomes stable, issuers will come to the market,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.
He added mutual fund houses were facing redemption pressure due to which the demand for fresh issuances was low. Besides, companies such as Rural Electrification Corporation and Housing and Urban Development Corporation Ltd were tapping the tax-free bonds route, rather than private placement of corporate bonds. A few arrangers believe issuances may pick up in the second half of this financial year, though companies would have to spend more. “In the second half, companies may start borrowing from the market through private placements, but at a higher rate as rates continue to be high,” said Arvind Konar, head (fixed income), Almondz Global Securities.
These expectations are based on the assumption liquidity would be eased further. On Friday, RBI had reduced the marginal standing facility rate by 75 basis points to 9.5 per cent. It also reduced the minimum daily maintenance of the cash reserve ratio from 99 per cent of the requirement to 95 per cent. The central bank has said all the liquidity tightening measures would be withdrawn in a calibrated manner.
