Icra: RBI liquidity infusion helps corporate bond spreads narrow to pre-Covid levels

By: |
November 3, 2020 8:55 AM

Spreads on corporate bonds over government securities (g-secs) of similar tenure have declined to pre-Covid levels by the end of Q2FY21, rating agency Icra said in a report on Monday.

Liquidity infusion measures announced by the Reserve Bank of India (RBI) and improved investor appetite for corporate bonds have supported the decline in spreads, the agency said.

Spreads on corporate bonds over government securities (g-secs) of similar tenure have declined to pre-Covid levels by the end of Q2FY21, rating agency Icra said in a report on Monday. Liquidity infusion measures announced by the Reserve Bank of India (RBI) and improved investor appetite for corporate bonds have supported the decline in spreads, the agency said.

The daily average spread on a AAA-rated bond over a g-sec in the 10-year segment in September was 80 basis points (bps), against 111 bps in February. In the five-year segment, the spread in September stood at 54 bps, lower than 57 bps in February. Better investor appetite was also reflected in the bond issuance figure of Rs 2.2 lakh crore during Q2, which marked 53% year-on-year (y-o-y) growth. On a cumulative basis in H1FY21, bond issuances rose toRs 4.47 lakh crore, 174% higher on a y-o-y basis.

Anil Gupta, sector head – financial sector ratings, Icra, said while the funds from the targeted long-term repo operations (TLTROs) were largely utilised by banks in Q1, the issuance activity in Q2 suggests better appetite across investor segments. “Given the regulatory stance of maintaining accommodative stance of monetary policy and surplus liquidity environment, the issuances could remain strong and spreads are likely to remain narrow over the next few quarters,” he said. With the spreads now below the daily average for the last five years, the scope of further decline, if any, remains limited, Icra said. Despite the decline in yields on corporate bonds, these remain attractive compared to other alternatives, which have also helped boost demand from investors and contributed to lower spreads.

Gupta said with improved investor appetite in the debt capital market, the certainty of accessing funds at competitive rates had improved. “This could also reduce the need for maintaining high on-balance sheet liquidity by corporates and non-banks as was witnessed during H1 FY2021, amid the prevailing uncertain funding environment,” he added.

Icra expects fresh bond issuances to rise toRs 8-8.2 lakh crore during FY21 fromRs 6.55 lakh crore during FY20. With estimated redemptions ofRs 4.95 trillion in the current year, the volume of corporate bonds outstanding is likely to rise to Rs 35.5-35.8 lakh crore, translating into y-o-y growth of 9.2-10% for FY21.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Stocks in focus: Tata Motors, Dr Reddy’s Lab, Reliance Capital, YES Bank, Vodafone Idea, bank stocks
2Stocking up: Foreign flows keep rupee strong
3Share Market LIVE: Sensex trades in red, Nifty tests 13,100; RIL, HDFC Bank, Infosys top drags