Various corporates and financial institutions are holding back plans to raise funds through domestic bond issuances anticipating that the Reserve Bank of India (RBI) will soften the tone at its monetary policy review in June. Companies such as Apollo Hospitals Enterprise, MRF, UltraTech Cement, Hindalco Industries and JSW Steel are in a wait and watch mode and have deferred immediate plans of bond issuance, three people with direct knowledge told FE.
The coupon on corporate bonds has increased since the beginning of the year. For the ‘AAA’ five-year bond, the coupon has increased by 25 basis points to 7.59%, while for the ‘AA’ five-year paper, the coupon is currently at 8.12%, compared with 7.87% at the beginning of the year.
The coupon on the ‘AAA’ three-year paper and the ‘AA’ three-year bond has gained 31 bps and 13 bps to 7.50% and 7.75%, respectively.”
“There is a view that the coupon will soften. So if I can borrow at a lower price after three months, I will wait for those three months – that is how most of them are thinking,” a senior trader with a foreign bank who did not wish to be named said.
Since most of the corporates have very little capital expenditure plans due to the overall sluggishness in the economy, there is not any immediate need for them to raise money, and they can wait till the rates cool. Most of the companies are looking to raise funds to refinance their existing loans or debt obligations.
Besides, the advantage that companies used to enjoy in the bond market over borrowing from banks has significantly diminished, with banks’ marginal cost of funds-based lending rate (MCLR) falling in the past few months.
State Bank of India slashed its MCLR by 90 basis points to 8% in January, and since then, many other state-run and private lenders have reduced their rates. On the other hand, companies looking to raise money through AA-rated bonds would have to pay a coupon of about 8.25% to 9%, depending on their credit profiles, a trader with a large private bank said on conditions of anonymity.
Last month, bond yields shot up after the RBI had released the minutes of the meeting of the monetary policy committee where executive director Michael Patra was of the view that a pre-emptive 25-bps hike in the policy rate was required to prevent the need for ‘back-loaded’ policy action as inflation was already too high.
However, the lower retail inflation print in April has led some traders to believe that the central bank would be less hawkish in June. Retail price inflation dropped to a record low of 2.99% in April from a nearly five-month high of 3.89% in March.
-By Shamik Paul