With yields cooling, companies flock to debt market in April-May

Data provided by treasury executives showed that corporate bond issuances in April-May were at ₹1.56 lakh crore as against ₹47,413 crore a year ago.

The data includes issuances by financial institutions, private non-banking financial companies and private sector manufacturing companies.

In its last policy statement on April 6, the RBI’s Monetary Policy Committee took markets off-guard by keeping the repo rate unchanged at 6.50% as against expectations of a rate increase.

Amongst other factors, the RBI cited the need to see the effect of previous rate hikes already delivered. The central bank has raised the repo rate by a total of 250 basis points from May 2022 to February 2023 in order to tackle high inflation.Following the RBI’s unexpected pause on policy rates, sovereign bond yields – which are the benchmarks used to determine pricing of corporate debt – fell sharply. This has made it cheaper for companies to raise funds through the debt market.

Since the RBI’s policy statement, yield on the most liquid four-year government bond has eased by 24 basis points, while the five-year bond yield has declined 15 basis points. Yield on the 10-year benchmark sovereign bond has plunged 30 basis points over the same period.

“While the spread over G-Sec yields has remained constant, the level of yields has moved sharply downwards. Bonds of PSUs like PFC (Power Finance Corp) and REC (Rural Electrification Corp) are around 7.40-7.45% while IRFC (Indian Railway Finance Corp) are around 7.30-7.35% in the secondary market,” a treasury executive said.

Meanwhile, bank MCLR remains higher following the resets carried out after the RBI’s tightening cycle. At present, SBI’s MCLR rates for one-month to three-year tenures are in a band of 8.10-8.70%.

“Bank MCLR is still catching up, every day you get to hear that a bank has raised it by 10 bps or 20 bps so that catch-up still continues to play out while capital markets (rates) have somewhat softened. That is what is leading more people to move to that front,” said Karan Gupta, director, India Ratings & Research.

Market participants also attributed heavy deployment of funds in corporate bonds by mutual funds as a factor that had propelled the surge in volumes.