Bond yield drops, corporate borrowing costs likely to fall
The cost of borrowing for Indian companies is likely to come down. Contrary to normal movements, the 10 year-benchmark govt bond yield is currently trading around 20-25 basis points lower than the policy or repo rate at 8%. In the last one month trading volumes have doubled from Rs 20,000-25,000 crore on an average a day to more than 50,000 crore.
Signs are that borrowing costs for Indian companies is set to dip. Contrary to normal movements, the 10 year-benchmark government bond yield is currently trading around 20-25 basis points lower than the policy or repo rate at 8%, at which banks borrow money from RBI. In the last one month trading volumes have doubled from Rs 20,000-25,000 crore on an average a day to more than 50,000 crore.
"In anticipation of a 25 basis point rate cut by RBI the benchmark yield has come off," said Arvind Konar, head of fixed income at Almondz Global Securities.
"The latest inflation figure added further fillip to the bond market. If RBI reduces policy rate by 50 bps rate on January credit policy, the yield may drop further to the tune of 15-20 bps from the current level. A lot of companies are waiting to tap the market once the rate falls post the monetary policy. They will be able to mop up funds at a cheaper rate."
India's headline inflation slowed to its lowest level in three years, fueling expectations for 50 bps rate cut by the central bank later this month to boost the growth engine. Also, there are signs that producers are unable to pass on higher costs resulting from increased fuel prices, revealing weak demand.
The wholesale price index (WPI), rose an annual 7.18% in December, the slowest since December 2009 and below analysts' forecast. WPI increased 7.24% in November, 2012.
"Rate cut is the way forward. Currently, bond market is discounting RBI (future) policy actions," Brinda Jagirdar, general manger (Economic Research), SBI; told moneycontrol.com. "I expect, the repo rate should fall by 100 bps in 2013. In January policy, RBI may go for 50 bps rate cut. However, corporates will raise money when only there are investment opportunities, which will essentially come through government reform measures. Macro parameters are still looking fragile. Economic recovery will be shallow," cautioned the economist.
It is often said that if, bond and equity markets give conflicting signals, always believe the bond markets. RBI will announce its third quarter (October-December) monetary policy on January 29, 2013. Earlier, the central bank hinted about slashing interest rate in its mid quarter policy document on December 17, 2012. On Tuesday, the weighted average yield of 10 year G-sec was at 7.81%. It has been hovering in the range of 7.80-7.85% since last fortnight.
"A lot of infrastructure companies are waiting to raise funds through public issues. Banks are offering higher rates that many cannot afford. Hence, they are putting their projects on hold. In this situation, interest rate has to come down. Otherwise, growth rate will slow down further. A lower rate is also helpful for the government to raise money and start spending," said a treasure head from a large non-banking finance company on condition of anonymity.
Under normal circumstances, companies with AAA ratings do no find problem in getting good lending rates. With AA+/- or BB+/- ratings, entities however, are not in a position to bargain with banks. Scouting for cheaper rates, they go for public bond issues to meet their funding requirements.