Companies’ borrowing costs have fallen to the lowest level seen since May 2013 with corporate bond yields in the 10-year segment dropping 25 basis points over the last two months. Heightened buying interest by the foreign institutional investors and expectations of rate cuts by the Reserve Bank of India are expected to drag yields, bankers said.
“Investors are expecting a 50 to 75 bps rate cut in 2015. A further drop in the yields is likely in coming months,” said Arvind Konar, head of fixed income at Almondz Global Securities.
Rural Electrification Corporation (REC) raised Rs 1,925 crore at 8.23% through 10-year bonds, 34 bps cheaper than their borrowing in December through a similar tenure.
Indian Railways Finance Corporation (IRFC) is planning to raise a minimum of Rs 1,000 crore and may even expand its borrowing to Rs 4,500 crore if it sees a strong interest from investors. IRFC could also benefit from the fall in yield, say bankers.
The yield on AAA-rated 10-year public sector unit (PSU) corporate bonds fell to 8.42% on Monday, according to data by Fixed Income Money Market and Derivatives Association of India (FIMMDA). This was the lowest since May 24, 2013, when the yield had hit 7.61%.
For AAA-rated 10-year corporate bond of a private company, the yield fell to 8.45% on Monday, down 4 bps from Friday’s close, according to FIMMDA data.
Bankers say that issuers could get 20 bps lower than the average benchmark yield indicated by FIMMDA from investors.
Power Grid Finance, which had raised bonds at 8.93% in October 2014, was able to issue bonds recently at 8.20%, down 73 bps in three months.
Corporate bond yields may fall further given the increase in investments from FIIs. Foreign investors poured in $2 billion into the local bond market so far in January, bulk of which was into corporate bonds. “FIIs are back into the market which had led to a drop in the yields. Market is expecting another rate cut somewhere before the end of the financial year,” said Ashish Jalan, assistant vice-president, SPA Securities.