‘Corporate bond market should stabilise as we enter new fiscal’

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Published: March 27, 2020 6:30 AM

Given the dent that is estimated on the GDP and also expected general slowdown across all sectors, there is a case for cutting rate by 50 bps. Globally, central bank have reversed their stand very quickly and cut rates despite their rates already trading in lower single digit. I would assume RBI may opt for a rate cut even ahead of the MPC scheduled meeting next month.

A lack of buying interest has pushed up corporate bond yields in recent times as institutional investors continue to remain on the sidelines following the Covid-19 lockdown. A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC, told Bhavik Nair in an interview that corporate bond market should stabilise with the beginning of the new financial year.

Edited excerpts:

How much credit crunch has the current scenario brought in? Where are corporates turning to for funding needs with corporate bond market so sluggish?

Rise in yields for AAA bonds across maturities is on account of lack of buying interest from institutional investors such as mutual funds, insurance companies and even banks. Banks have been selectively buying securities using the advantage of high liquidity at this point of time. Corporates, too, have been availing the working capital limit when they find market borrowing is costly compared to working capital rates. This should not last for too long given the fact the money with mutual funds would come back as we move into the new financial year.

Do you think the illiquidity faced by the corporate bond market could be solved without any measures from the RBI? How long will the rise in yields continue?

Whenever the inflow into MF debt schemes is normal, corporate bond market generally sees good liquidity and good price discovery. On top of it, FIIs too are active in the bond market apart from local insurers and treasuries of various companies and banks. In times like these, central banks do look at providing support to the financial market to stabilise interest rate and liquidity. Having said that, once the year-end pressure is over, and the money comes back on rotation, we should see the yield getting stabilised quickly thereafter.

When do you see primary bond market issuances coming back to normal? And how difficult will it be for sub-investment grade bonds to be issued then?

Primary bond market issuance should come back to normal as we get into new fiscal. Bond market generally behaves normal during times of high liquidity and when general participation levels are high. I assume it will come back soon. Sub-investment grade would take some time to come back as MF credit funds have not been growing in size. As the money available for such schemes begin to go up, we will see the appetite for sub-investment grade bonds to come back. Right now, it is very selective purely on the back of strength of the underlying security covenants.

MFs are facing redemption pressures and the only trading activity that funds are involved right now seems to be to manage those redemption requirements. How are you managing the scenario?

MFs’ redemption pressures are generally bound to occur each year before fiscal end. Purely on the basis of our experience, our fund managers had created liquidity to meet any such redemption and also look for buying opportunities if the yield spikes. We as a fund house are exactly acting on these principles, having said that redemption payments are also being met out of short-term borrowing within the Sebi-prescribed norms.

The RBI has come out with many liquidity operations but rate cut is yet to come. When do you think it would announce a monetary action and what would be the quantum of the cuts if any?

Given the dent that is estimated on the GDP and also expected general slowdown across all sectors, there is a case for cutting rate by 50 bps. Globally, central bank have reversed their stand very quickly and cut rates despite their rates already trading in lower single digit. I would assume RBI may opt for a rate cut even ahead of the MPC scheduled meeting next month.

How much firepower do you think the RBI has to tackle the current rout in the debt market?

The RBI has got enough tools with it over and above the monetary policy tool of interest rate. LTRO and OMO are both powerful tools which it has been using very effectively to calm down the market yield spikes and also provide liquidity to the banking system. It can further provide support to the entire banking system via the change in NPA recognition norms, etc, especially in times like today. Historically, RBI has done such things, hence it is only the question of when do they use such tools to provide support to the bond market as well as financial market in general. Probably they may have to take a few steps which are unconventional, the way Fed does all the time, such as buy back of bonds or repo against corporate bonds, etc.

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