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Informist, Thursday, Feb. 13, 2025

 

By Sachi Pandey and Ashna Mariam George

 

MUMBAI – The corporate bond market began the last quarter of 2024-25 (Apr-Mar) with a noticeable slowdown, with the total quantum of issuances in January dropping 30% from December. Companies raised INR 790 billion through the placement of 210 bonds in January, against INR 1.13 trillion in December through 265 bond offerings, according to data from the National Securities Depository, compiled by Informist. In January last year, companies had raised INR 724 billion through 215 bond issuances. 

 

Although the fall in fundraising through bonds was mostly cyclical, with January usually being a quiet month for debt issuances, market participants also cited other factors such as global market volatility for the slow pace of issuances last month.

 

The volatility in US Treasury yields led to choppiness in Indian benchmark government bond yields, which unsettled the corporate bond market as well. Even though the net movement in yields last month was not large, they oscillated widely by almost 15-20 basis points during the month. The 10-year US Treasury bond yield, which ended January at 4.58%, fluctuated sharply in January, spiking to 4.79% on Jan. 13, before dropping to 4.61% just three days later. 

 

A similar pattern was seen in Indian government securities and corporate bonds as markets globally tried to digest the implications of US President Donald Trump's protectionist policies.

 

This whipsaw in yields across segments made issuers hesitant to tap the bond market. Isusers also took a call to not lock in long-term borrowing costs at higher rates, especially when they anticipated potential rate cuts in the near future. Investors, too, awaited key events including the Union Budget for 2025-26 (Apr-Mar), which was presented on Feb. 1, and the Reserve Bank of India's Monetary Policy Committee's meeting held during Feb. 5-7.

 

"Market yields saw significant volatility in January, primarily driven by uncertainties surrounding the US presidential elections and concerns over potential trade policies. The anticipation of new tariffs created ripples across global markets. Additionally, domestic factors like the upcoming budget and rate cut expectations led issuers to adopt a wait-and-watch approach," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.

 

Yogesh Kalinge, associate director at AK Capital Services, added to the point, "this uncertainty (regarding US President Donald Trump's policies) was primarily what the borrowers were not comfortable with. So that was the major reason."

 

Apart from this, the rupee's continued weakness against the US dollar created further concerns for foreign investors, who turned wary of the currency risk associated with Indian bonds. Fearing that the rupee's depreciation would erode their returns, foreign investors became more hesitant to participate in the Indian bond market, which further compounded the pressure on corporate bond issuances. 

 

As of Jan. 31, foreign portfolio investors utilized only INR 1.12 trillion, or 14.67%, of the INR 7.64 trillion investment limit in corporate bonds.

 

Additionally, the ongoing liquidity crunch in the banking system contributed to the decline in bond issuances. Although the Reserve Bank of India implemented measures such as bond purchases under open market operations to ease the strain, liquidity conditions in the banking system remained tight. This made it difficult for certain institutional investors to purchase corporate bonds, and issuers were reluctant to come to the market when demand seemed uncertain.

 

The systemic liquidity deficit rose to a one-year high on Jan. 24 and remained over INR 2.00 trillion for more than half of the month. The net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 3.16 trillion, the highest level since Jan. 24, 2024.

 

Funds raised by public sector companies in January fell by more than half as compared to December. Public sector companies raised INR 267.88 billion in January against INR 544.26 billion in December. The issuer of what is considered the corporate bond benchmark paper--National Bank for Agriculture and Rural Development--was the largest borrower in January, raising INR 94.12 billion through two bond issuances. 

 

It is also worth noting that only one bank--Bank of Baroda--tapped the corporate bond market in January. The lender raised INR 50 billion through infrastructure bonds maturing in 10 years at a coupon of 7.23%. In December, banks raised funds worth INR 90 billion against INR 204 billion raised in November.

 

Non-banking financial companies were also more or less absent in January, with companies raising only INR 112.94 billion. However, housing finance companies saw an uptick in issuances, raising INR 92.5 billion in January, up from INR 63 billion the previous month.

 

January also saw an issuance from the infrastructure investment trust sector, that too, a zero-coupon bond. National Highways Infra Trust Ltd., an infrastructure investment trust backed by the National Highways Authority of India, raised INR 20.32 billion at a yield of 7.75% on its zero-coupon bonds maturing on Jan. 30, 2035. However, its Jan. 30, 2042 bond from which it planned to raise INR 10.70 billion, was scrapped due to poor investor demand.

 

Looking ahead to February, market participants are hopeful of a potential rebound in corporate bond issuances with public sector entities expected to be a key contributor. However, experts believe that a heavy supply of state development loans, coupled with ongoing liquidity issues, could put upward pressure on corporate bond yields.

 

"We will have higher issuances in corporate bonds this quarter (Jan-Mar), but corporate bond spreads might widen further. Even though there is a positive sentiment with rate cut and OMOs (open market operations) but they are concentrated in gsec only. Given the overall liquidity condition is tight, it might put some upward pressure on the corporate bond spread," Pankaj Pathak, senior fixed income fund manager at Quantum Asset Management Co., said. "The increased supply of SDL loans will also put some pressure on corporate bonds yield. Though there won't be any problem in terms of investor appetite, but investors might demand higher yield premium due to increased issuances" Pathak added. 

 

As of now, the spreads between 10-year government securities and corporate bonds of similar maturity is 45-50 basis points, while spreads between corporate bonds and state bonds range between 15 bps and 20 bps.  End

 

Edited by Deepshikha Bhardwaj

 

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