Corporate Bond Sales in India to Slow Down as Borrowing Rates Hit 7-Year High

Corporate bond sales in India are expected to slow down as borrowing rates hit a seven-year high, according to investors and merchant bankers. The surge in borrowing costs is attributed to higher policy rates and tighter liquidity conditions from the Reserve Bank of India.

Bond Yields Reach Seven-Year High

The LSEG benchmark yields on AAA-rated corporate bonds in the two- to five-year maturity bucket rose above 8 per cent last week, the highest since January–March 2019. This significant increase in yields is expected to delay fund-raising plans for many issuers.

In May, the two-year AAA corporate bond yield surged by about 40 basis points, while yields in the three- to five-year segment rose by around 30 basis points.

Impact on Fund-Raising Plans

The sharp rise in corporate bond yields increases borrowing costs, making it less attractive for companies to raise funds through bonds. This shift is likely to accelerate the adoption of floating-rate bonds, short-term borrowings, and bank loans.

Market Impact and Details

• Indian companies raised around 1.07 trillion rupees ($11.24 billion) in April-May, the lowest for the first two months of any fiscal year since 2022.
• The pipeline for the next couple of months looks very thin and could at most touch around 1 trillion rupees, four merchant bankers said.
• Companies issued 1.75 trillion rupees of debt in the same period last year.
• Banks’ credit to non-banking financial companies jumped nearly 28 per cent in April to 20.56 trillion rupees.

Key Takeaways

• The sharp rise in corporate bond yields is expected to slow down corporate bond sales in India.
• Companies are likely to shift towards floating-rate bonds, short-term borrowings, and bank loans due to higher borrowing costs.
• The pipeline for the next couple of months looks thin, with a potential issuance of around 1 trillion rupees.

FAQs

What is the current state of corporate bond yields in India?

The LSEG benchmark yields on AAA-rated corporate bonds in the two- to five-year maturity bucket have risen above 8 per cent, the highest since January–March 2019.

How will the rise in corporate bond yields impact fund-raising plans?

The sharp rise in corporate bond yields increases borrowing costs, making it less attractive for companies to raise funds through bonds.

What is the expected impact on the bond market?

The shift towards floating-rate bonds, short-term borrowings, and bank loans is expected to accelerate, as companies seek to reduce their borrowing costs.

Conclusion

The recent surge in corporate bond yields is expected to slow down corporate bond sales in India. As borrowing costs rise, companies are likely to shift towards alternative funding options, such as floating-rate bonds, short-term borrowings, and bank loans. Investors and merchant bankers are advising companies to reassess their fund-raising plans and consider alternative options to mitigate the impact of higher borrowing costs.

As the Reserve Bank of India continues to tighten liquidity conditions, the bond market is expected to remain volatile. Companies and investors must be prepared to adapt to these changes and consider alternative funding options to stay ahead in the market.