Indian state-run and private banks are likely to tap the debt market to raise capital in the coming months, before the central bank embarks on its rate-hike cycle, top analysts and bankers told Moneycontrol on April 18. Among the banks that plan to hit markets for funds are ICICI Bank, HDFC Bank and some large state-owned banks, according to people familiar with the development.
Banks are charting out their fund-raising plans in anticipation of a hardening corporate bond yield curve as rising inflation worries could prompt the Reserve Bank of India to hike the key repo rate by 25 basis points in the Monetary Policy Committee’s next policy in June. The repo rate is the rate at which the central bank lends short-term funds to banks.
Inflation, measured by retail prices, escalated to a 17-month high of 6.95 percent in March from 6.07 percent in February, driven by high food prices. Market participants anticipate a hardening corporate bond yield curve as rising inflation worries could prompt the RBI to hike the key repo rate by 25 basis points in June.
“What we are likely to witness is an increase in banks’ fundraising in the next few months, before the RBI’s policy,” said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap, a Mumbai-based debt advisory firm.
“Moreover, banks are likely to refinance their earlier borrowings in the coming months. A few banks, including Canara Bank and Union Bank, issued perpetual bonds before March to capture the lower interest rates and are likely to continue this fiscal year too, besides other large state-owned banks,” Venkatakrishnan added.
In the April round of the monetary policy review, the Monetary Policy Committee (MPC) had kept the key repo rate steady at 4 percent for the 11th straight time, but had flagged worries over rising inflation. Economists expect retail inflation to stay over the RBI’s tolerance band in the coming months, assuming energy prices remain elevated due to the Russia-Ukraine war. The MPC’s next policy decision is due on June 8.
Also read: What the MPC tells us about RBI’s communication strategy
Early movers
Before the April policy, many banks had already started fundraising assuming a rising interest-rate scenario. For instance, in March, state-run Indian Overseas Bank raised Rs 665 crore by issuing 10-year Basel III compliant Tier II bonds at a coupon of 8.60 percent, according to dealers.
UCO Bank, too, raised Rs 100 crore last month via a similar bond issue at a coupon rate of 8.51 percent. Karnataka Bank sold its 10-year Basel III compliant Tier II bonds at a coupon rate of 10.70 percent last month, dealers added. This is at a premium compared with the 10-year government bond, which currently yields 7.23 percent.
Some banks have already received their boards’ approval for fund raising. On April 16, for instance, HDFC Bank’s board approved a fund-raise of Rs 50,000 crore via bonds. In March, Punjab National Bank’s board had approved raising capital via the issue of Basel III-compliant additional Tier I bonds up to Rs 5,500 crore and Tier II bonds up to Rs 6,500 crore, in one or more tranches.
“The market has already begun to discount a 25-basis-point rate hike by the RBI in the June policy review, and if this happens we are expecting the corporate bond yield curve to harden at least 25 basis points further,” said Ritesh Bhusari, Deputy General Manager, Treasury, at South Indian Bank. “We expect the pain in the corporate bond market to accentuate from here.”
According to Anil Gupta, Vice President & Co-Group Head, Financial Sector Ratings, at rating agency ICRA, as bond yields rise and as the RBI sucks out surplus liquidity from the banking system, not only would corporate bond yields rise but spreads with government securities are also expected to widen in the coming months.
Rockfort Fincap’s Srinivasan expects banks to issue bonds in the 7-year to 15-year segment in the next three months, and spreads to increase by at least 50 basis points compared to the February or March corporate bond traded levels.
The fund-raise during this period could help banks take advantage of a comparatively lower interest rate considering the market expectations of continuous rate hikes by the RBI this fiscal year, and simultaneously help address growing credit demand, Srinivasan added.
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