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Informist, Tuesday, Jun. 3, 2025

 

By Vaishali Tyagi

 

MUMBAI - Fundraising through the private placement of corporate bonds saw an on-year increase in May, as corporates rushed to take advantage of the ample liquidity in the banking system which boosted investors' appetite. Lower borrowing costs on expectations of another repo rate cut by the Reserve Bank of India's Monetary Policy Committee in June also led to higher fundraising by companies last month.

 

According to data from the National Securities Depository Ltd. and Informist, fundraising through corporate bonds rose by nearly a third on-year to INR 965 billion in May through the placement of 196 bonds. In the same month last year, corporates placed 238 bonds worth only INR 730.0 billion. Issuances rose on year for the third straight month, with fundraising in April at INR 1.03 trillion through 213 bonds, and that in March at INR 1.29 trillion through 291 bonds.

 

"The RBI's liquidity infusion, through variable rate repo auctions and open market operation auctions, has had a ripple effect on the corporate bond market, with companies taking advantage of the favourable conditions to raise funds through bond issuances," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP. In May, banking liquidity averaged a daily surplus of INR 1.7 trillion.

 

"As bank loan rates have not adjusted similarly after the last policy rate cut in April, corporate bonds have become an attractive resort for issuers to raise funds. Hopes of a policy rate cut in June have also pulled borrowing costs down...this trend (of higher issuances) is expected to continue in the coming months, with companies looking to tap the bond market to meet their funding requirements," Srinivasan said.

 

The Monetary Policy Committee is widely expected to lower the policy repo rate by 25 basis points for the third consecutive meeting on Friday, according to a poll of 14 economists and treasury officials by Informist. Thirteen respondents anticipate a rate cut to 5.75% from the current 6.00%, aimed at supporting growth amidst a challenging global environment and lower-than-aim inflation. However, some market participants expect a deeper cut of 50 bps. Any deviation from the widely anticipated 25 bps—on either side—could lead to a corresponding market reaction in yields.

 

On a month-on-month basis, corporate bond issuances saw a slowdown in May, as companies were busy seeking mandatory approvals for their new financial year business plans and were focused on their balance sheets. Fundraising increased after the reduction in the repo rate, with the rate-setting panel bringing down the policy rate by total of 50 bps in its February and April meetings. Moreover, the RBI's constant liquidity injections through open market operations helped pile cash with investors.

 

In the initial days of May, corporate bond yields surged in the secondary market as tensions between India and Pakistan escalated following a terrorist attack in Jammu and Kashmir's Pahalgam. Yields on 3-year and 5-year bonds rose by 7-8 bps, while 10-year bond yields increased by 5-6 bps on concerns over the conflict spilling into war after cross-border strikes between the neighbours on May 7-10.

 

Despite the tensions, market participants said that the conflict had a limited impact on bond issuances. The uncertainty surrounding the conflict's intensity and duration initially led to some caution, but it did not significantly affect activity. "In the initial part, people were not sure how aggressive this war is likely to be. But then it turned out to be only for three-four days, yet I think there was not much impact of it on bond market issuances. It might have contributed to some extent but not really," said Ajay Manglunia, executive director, Fixed Income Markets at Capri Global Capital Ltd.

 

The slowdown in May is also a seasonal trend as companies are still not ready with business plans, as they are still analysing the previous year. As the June quarter nears its close, issuances should gain further momentum as companies look to meet business requirements, Manglunia said.

 

Public sector entities continued to be the major issuers in the corporate bond market. However, fundraising by public sector companies fell to INR 323.99 billion in May from INR 392.64 billion in April. Among these, Indian Railway Finance Corp. was the largest issuer, raising INR 90.00 billion through three bond offerings, followed by REC, which raised INR 56.35 billion through two bond issuances. In May, the Export-Import Bank of India scrapped its 10-year bond issuance worth INR 25 billion, as investors demanded a coupon higher than the issuer's expectation.

 

Non-banking finance companies raised INR 203.6 billion in May, higher than the INR 152.2 billion raised in April. On the other hand, fundraising by housing finance companies slumped 47% on month in May to INR 28.35 billion.

 

Banks remained absent from the corporate bond market in May, with no issuances reported. According to Srinivasan, this is a typical trend exhibited by banks in the initial months of a new financial year, and they are likely to hit the market from June. Having built cash buffers in March through certificates of deposit and bond issuances, banks had ample liquidity in both April and May, he said. Liquidity was likely aided by easier conditions in the money market as well, where overnight rates have fallen below the Standing Deposit Facility rate of 5.75%.

 

The corporate bond market too witnessed a notable decline in bond yields across tenures in May. The three-year and five-year segments saw significant falls of 30 bps and 23 bps, respectively, while the 10-year bond yield dropped by 12 bps. The decline in corporate bond yields was primarily driven by expectations of a rate cut and easy liquidity conditions. The fall in government bond yields also contributed to the decline in corporate bond yields as investors looked to lock in the higher yields offered by corporate bonds.

 

Looking ahead, market participants anticipate a surge in bond issuances in the coming quarters, driven by expected policy rate cuts by the RBI. As lenders face challenges due to high funding costs and intense deposit competition, corporate bond markets are likely to benefit from faster lending rate transmission. According to ICRA, a rate-cut scenario favours domestic debt capital market issuances, making bonds a preferred funding source for large, well-rated corporates over bank loans.

 

The rating agency expects corporate bond issuances to remain strong in 2025-26 (Apr-Mar), driven by cautious lending by banks to non-banking finance companies and cooling-off of benchmark government bond yields. The agency also forecasts domestic debt capital markets to remain competitive compared to external commercial borrowings.  End

 

Edited by Tanima Banerjee

 

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