A tighter cash-flow situation and the surge in government debt auctions have been casting a shadow over bonds issued by India Inc. Liquidity fears have dried up corporate bond issues and the latest casualty of high interest rate has been the Rs 100-crore floating rate bond issue of Power Finance Corporation (PFC), which now stands cancelled.

As part of its borrowing plan, PFC had proposed to raise Rs 100 crore through a 10-year floating rate bond issue, in step with one-year Indian government securities benchmark rate (INBMK). Although against the requirement of Rs 100 crore, PFC received offers for over Rs 175 crore, the margin over GSEC that banks/investors quoted was leading to a higher overall cost than the tenure-fixed cost.

Sources said the bid by investors, including I-Sec, HSBC and Axis, ranged between 199 and 250 basis points over the one year INBMK (7.913% as on November 19, 2007). The effective rate for the first year, taking the L-1 quote of 190 basis points stood at 9.903%

Currently, with interest rates being very high, there is hardly any demand for corporate bonds. Confirming that PFC has dropped its bond issue, one of the bidders said, ?It has been confirmed by PFC that following the high spreads quoted by the investors, it was not going ahead with the bond issue. They may now waiting for yields to settle down. PFC may try again by reducing the tenure. This may be as early as next month?

Commenting on PFC?s bond issue, investors said this was an ill-timed structure and benchmarking a longer duration bond to a one-year rate deterred the investors. Given the trend, it is still not clear whether borrowers like National Bank for Agriculture and Rural Development will go ahead as per the schedule for its proposed Rs 500 crore, three-year bonds.

While in October, corporates like HDFC, Indian Railway Finance Corporation and IL&FS, LIC Housing Finance and few banks tapped the market with a variety of bond issuances, including perpetual debt and upper tier-II bonds, liquidity in the banking system tightened soon after the Reserve Bank of India (RBI) announced its mid-term credit policy statement, wherein the central bank hiked the cash reserve ratio (CRR).

Prior to the announcement of the mid-term policy review, the banking system was flush with cash, to the extent that banks used to lend anywhere between Rs 30,000 and Rs 50,000 crore on a daily basis However, the hike in CRR announced by RBI saw a drainout of funds worth almost Rs 16,000 crore from the system.