Bond yields could fall further in the coming months as the next move by RBI will be a rate cut, as early as January, says Sidharth Rath, president — treasury, business banking and capital markets at Axis Bank. In an interview with Aparna Iyer, Rath said the drop in yields has lowered the cost of borrowing for companies but those with ratings of BBB find the loan market cheaper. Moreover, the bond market prices in credit risk in a more democratic and secular way compared with the loan market, feels Rath. Excerpts:
Bond yields have seen a sharp fall over the last two months. Has this made it easier for lower-rated companies to raise funds?
Companies that find it very easy to raise money are typically the high-rated ones. For them there is a clear arbitrage of cost at present. For companies with AA rating, the cost of borrowing in the loan market is around 12-13%, but in the bond market it could be 10%, so there is a clear arbitrage on cost. Even companies with a rating of AA- can find it fairly easy to raise money. But those having BBB rating and thereabouts, for them it is still cheaper to borrow from the loan market. So in the corporate bond market, the high-rated companies have an advantage of lower yields compared with interest rates in the loan market. But this turns the other way around for lower-rated companies. Although the need to raise funds is greater for a BBB company, there is no appetite for such bonds. Big investors such as insurance companies go for not less than AA papers.
Why is this difference for high- and low-rating companies?
We have seen that in the bond market, the credit risk is priced much faster and it is more scientific. But in the loan market, it is not so. There is a formula for calculating the base rate. But when it comes to spreads over the base rate, it is not a standard scientific process.
How much of a rate hike has the bond market priced in and what is your outlook in yields?
The bond market was earlier pricing in a 50-basis-points rate cut. I think now the expectation is more, 75-100 basis points. I would think the 10-year government bond yield could be anywhere around 7.50% by March. It also depends on the annual Budget which would be in February.
The bond yield curve is flat, when do you see a correction in this?
The yield curve is flat to inverted at present. The correction will happen when we see policy rate cuts or we liquidity improving in a big way. CP issuances are exceeding bank loans.
How long this could sustain?
Issuances will exceed bank loans until we see base rates coming down. So, at least for the next 2-3 months, this trend will sustain. There is already a secular falling trend in deposit rates and this would soon bring a fall in the lending rates as well. We have also cut deposit rates.
After the infrastructure bond issue, do you have any plans to raise funds through other means?
We had the eligibility to raise that much so we raised Rs 5,700 crore from the infrastructure bonds. Besides IFC, Life Insurance Corporation invested more than Rs 1,000 crore in our issue. The funds have already been lent to affordable housing and infrastructure. We do not need to raise more funds at present, but we will keep looking at market conditions. We have an MTN programme of 2 billion euros under which we have still room left to raise money.