The share of bonds and and commercial paper (CP) in overall borrowings has increased from 19% in March 2011 to 27% as on December, 2016, indicating increasing disintermediation.
The share of bonds and commercial paper (CP) in overall borrowings has increased from 19% in March 2011 to 27% as on December, 2016, indicating increasing disintermediation. One key reason for the rising disintermediation has been the lower interest rates in bond markets. Ratings agency ICRA expects gross bond issuance through Government of India securities (G-Sec), state development loans (SDL), UDAY bonds and municipal debt to remain stagnant at R10.7 lakh crore in FY2018. However,the growth of corporate bond issuances is estimated to be substantial at 20-22% in FY2018, with gross issuances rising to Rs 8.5 lakh crore.
According to ratings agency ICRA, the divergent trend is largely driven by slower transmission of policy actions on bank lending rates, as banks have not passed the cut in deposits rates in lending rates. Banks have been reluctant to pass on the lower cost of wholesale money via the base rate as it would impact their net interest margins. They have, however, lowered the marginal cost of funds rate (MCLR).
Investments into the bond markets have doubled since FY12, thanks to a significant increase in investments by life insurance and mutual funds (MF), a presentation by ICRA reveals.
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Investment by life insurance companies have increased by 102 basis points (bps) from 8.02% in FY2016 to 9.04% in the nine month period of FY17. Investments by mutual funds have increased by 51 bps during the same period.
“Insurance companies with a share of 45% are the largest investors in bond markets. Moreover, investments in bonds are growing at 15% CAGR over last five years,” Karthik Srinivasan, group head (financial sector rating), ICRA ,said.
In contrast, participation by foreign institutional investors in the debt capital market has slowed. FIIs’ investment in debt capital market dropped by 36 bps from 1.62% in FY2016 to 1.26% in the nine-month period of FY2017.
“The yield on the 10-year G-Sec has reverted to the level seen before the note ban, SDL yields are now 20 bps higher than the level recorded in the auction on November 8, 2016, following the announcement in mid-January 2017 of the exclusion of most states from utilising NSSF inflows to fund their fiscal deficits.
While ICRA expects bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to G-sec”, Srinivasan added.
As indicated in the Union Budget 2017, the gross borrowings of the government through dated securities are expected to remain flat at R5.8 lakh crore in FY2018. However, ICRA estimated that the gross market borrowings of the state governments to rise by 22% from R3.7 lakh crore in FY2017 to R4.5 lakh crore in FY2018, on account of larger fiscal deficits, a spike in debt repayment from FY2018 onwards and the exclusion of most states from investing in the NSSF from April 1 last year.