Modi’s borrowing boost to revive economy: India Inc may be the collateral damage

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Published: May 11, 2020 1:20 PM

Policy makers around the globe have been tapping debt markets as they roll out more stimulus to counter the economic fallout of the pandemic.

The average spread on top-rated three-year company notes is already at a more than six-year high of 189 basis points.The average spread on top-rated three-year company notes is already at a more than six-year high of 189 basis points.

A new threat is growing for India’s local credit market, already reeling under the strains of the Covid-19 pandemic, world’s biggest lockdown and a prolonged shadow bank crisis.

Corporate borrowers now also risk getting crowded out as the government steps up debt issuance. The latest move came late Friday, when Prime Minister Narendra Modi’s government said it will borrow 12 trillion rupees ($159 billion) in the fiscal year that began April 1, 54% more than budgeted.

Policy makers around the globe have been tapping debt markets as they roll out more stimulus to counter the economic fallout of the pandemic. The risks that any strains in government finances pose to credit markets are particularly big in India, where state companies dominate local currency bond sales.

The country’s plan for additional borrowing risks crowding out corporate issuers and pushing financing costs higher, according to Ajay Manglunia, managing director and head at JM Financial Products Ltd.

Yields on AAA graded company notes maturing in three years and 10 years each jumped as much as 20 basis points on Monday on government’s additional borrowing plan, according to traders. The average spread on top-rated three-year company notes is already at a more than six-year high of 189 basis points.

A further increase in financing costs will put added pressure on already-struggling borrowers, and also threatens to dilute the impact of the central bank’s unconventional policy steps to keep credit spreads in check.

To be sure, some investors may still prefer buying top-ranked higher yielding rupee corporate bonds, particularly given the concern that increased supply could weigh on government bonds and make company securities more attractive in comparison.

Key tests will come this week, as state-run National Housing Bank seeks bids for as much as 20 billion rupees of notes maturing in about three years on Monday and Indian Renewable Energy Development Agency Ltd. plans an up to 30-billion-rupee issuance the next day.

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