India’s bond market is seeing a sharp divergence in strategy, with investors and issuers spilt over the likelihood of a rate cut by the Reserve Bank of India (RBI) in the December policy review next week.
Convinced that the central bank will hold rates on December 5, a section among corporate borrowers is rushing to issue bonds, locking in lower costs fearing that sticky inflation could push future borrowing costs.
On the other hand are issuers and investors who are convinced that a rate cut is coming. Investors are demanding higher coupons in expectation of falling yields, while borrowers are choosing to delay issuance, waiting to tap the market in hopes of cheaper funds after the rate cut.
This push and pull has led to uneven issuance trends and volatile pricing in the corporate bond market, reflecting the deep uncertainty over the RBI’s next policy move.
This week Rs 25,023 crore was raised through corporate bonds. Corporates and banks raised Rs 15,193 crore via BSE’s electronic book platform and Rs 9,830 crore on NSE’s EBP.
This signals strong corporate funding demand and diminishing expectations of a December rate cut, experts said.
However, National Bank of Agriculture and Rural Development (Nabard) and Power Finance Corporation this week scrapped plans to issue bonds after investors demanded higher coupon rate, expecting a rate cut.
The expectation of a rate cut gained ground as inflation remains historical low.
On November 21, a Moneycontrol poll of 18 economists, treasury heads and fund managers said that the RBI’s MPC is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy due to the comfort provided by the lowest ever Consumer Price Index (CPI) inflation in the last two months.
If the RBI goes for a rate cut in December, it will be the first after maintaining status quo in the last two policies.
The RBI has so far reduced repo rate by 100 bps from 6.5 percent to 5.5 percent between February and June. It left the rate unchanged in August and October.
The MPC meets from December 3 to 5 for another round of rate-setting deliberations.
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