The decisions announced by several banks over the last couple of days to cut their marginal cost of funds-based lending rate by up to 90 basis points were cheered by the debt market on Monday, with the 10-year benchmark government bond yield declining by over 10 basis points in the session to close at 6.41%.
Experts believe that yields on both government securities and corporate bonds are likely to decline further.
“The drop in lending rates will reflect in the debt market as well. If you see, the 10-year closed 10 bps lower today and I think yields will fall a bit further. Now that transmission has taken place, there is increased expectation of a rate cut in the next monetary policy and all these factors will pull yields down,” said Ajay Manglunia, head of fixed income at Edelweiss Securities.
With the lowest one-year MCLR, which is that of State Bank of India (SBI) at 8%, corporate bond yields are also expected to fall in the near future. Manglunia said the rate cut by banks was not expected to have a major impact on funds being raised through issues of corporate bonds since it would continue to be significantly cheaper to do so.
As on December 30, the FIMMDA index for yields on AAA-rated 1-year corporate bond stood at 7.13%, which is still considerably lower than the lowest revised MCLR. At the same time, the index for yields on 10-year AAA-rated corporate bonds stood at 7.58%.
Ashutosh Khajuria, chief financial officer and president of treasury at Federal Bank, said yields on bonds are likely to fall further. “It is bound to have an impact because overall cost of funds has been brought down by the banks,” he said.
Khajuria, however, believes that now that the gap between the coupon on a corporate bond and the MCLR has been shortened, corporate would borrow more from banks than they did before.
“With NCD issues, I think, we could see some impact. I think even banks would prefer lending directly to corporate instead of buying their NCDs because investments in NCDs have to be marked to market at regular intervals. With loans, banks do not bear that risk,” Khajuria said.
The banker, however, added that commercial paper, which is another debt instrument used to raise short-term funds, will continue to be preferred over borrowing because the gap in yields of CPs and the lowest MCLR is close to 200 bps.
Market participants now expect yields on corporate bonds, which largely track movement in yields on government securities, to fall further and then settle into a range bound movement.
“The corporate bond market is typically illiquid and it usually mirrors the benchmark. Even today, we saw the same thing; the benchmark fell by just over 10 bps and the corporate bond yields also fell by a similar number. So we expect yields to fall further by about 10-15 bps and then settle into a range. After that, it will depend on actions by other banks, key economic indicators and whether or not expectations of further rate cuts by the central bank are built in the market as a result of this,” said Lakshmi Iyer, chief investment officer of debt at Kotak Mahindra Asset Management Company.