Money is becoming costlier. On Tuesday, two large private banks priced a Rs 7,000-crore one-year certificate of deposit (CD) issue at 7.45-7.55%. With this, yields in the corporate bond market have effectively shot up about 100 basis points (bps) in a little over a month. According to market participants, the prevailing rate on one-year CDs in early December was 6.6-6.7%. For perspective, State Bank of India’s MCLR, or the marginal cost of funds based lending rate, for one year is 7.95%. The yield on the Fixed Income Money Market and Derivatives Association (FIMMDA) 10-year benchmark for AAA-rated corporates has shot up 40 basis points (bps) since the end of September 2017. The yield closed Tuesday’s session at 7.94% – 69 bps above the yield on the benchmark 10-year government security (G-Sec). Net corporate bonds outstanding at the end of December, 2017 was Rs 26.5 lakh crore, up 16% year-on year. Non-food credit, or loans to companies and individuals, grew at 11.5% in the fortnight to January 5, 2018. Ajay Manglunia, executive vice president and head – fixed income at Edelweiss Securities, said the volume of issuances has fallen because of the rise in yields. “Apart from the yields, if you look at it, in the last three months, the yields on government securities have gone up by up to 100 basis points. Compared to that, the yields on corporate bonds have not risen so much,” Manglunia said, adding, “that is broadly because of the lesser supply of the corporate bonds.”
According to data released by the Securities Exchange Board of India, the quarter ended December 2017 saw 484 corporate bond issues worth Rs 1.36 lakh crore against 793 issuances worth Rs 1.69 lakh crore in the same period a year ago. This may well mark the beginning of a shift in favour of bank borrowings. Ashutosh Khajuria, executive director and chief financial officer at Federal Bank, said the first casualty from here on would be yields in the commercial paper (CP) market. “CPs also will become costlier and the banks are not likely to tinker with their MCLRs too soon,” Khajuria said. “But, the message is loud and clear that gradually, transmission may start happening in a northward direction. The first to rise will be CPs and once CP rates match MCLRs, borrowers may move to avail of their bank credit limits,” Khajuria added.
The two events determining the movement of yields in the days ahead would be the Union Budget for 2018-19 on February 1 and RBI’s monetary policy review on February 6. The impact of the two on the markets is likely to determine corporates’ decisions on the preferred source of borrowing. Manglunia sees the spread over the G-sec rising to around 60-70 bps, effectively inching close to 8%. Khajuria, however, takes a slightly longer view and sees the liquidity situation easing somewhat in March, with market stabilisation scheme (MSS) bonds worth Rs 1 lakh crore maturing in March. If that happens, it would be something of a reversal of the typical situation in the last month of a financial year when heightened demand for money leads to a tightness in liquidity conditions.