Corporate bonds borrowing cost may fall on shift in demand as govt borrowing completes: Experts

Government bonds are the preferred investments given their inherent safety, and it is when the government hits the end of its market borrowing cycle that most investors move towards corporate paper.

Companies raising money through corporate bonds may have an easier time soon, according to experts. That’s because according to them, the cost of borrowing via such bonds is likely to see a downward trend due to investor demand shifting to these instruments as the government’s borrowing programme is done, experts said.

Government bonds are the preferred investments given their inherent safety, and it is when the government hits the end of its market borrowing cycle that most investors move towards corporate paper.

“It's possible that with the completion of Indian government borrowing, investors may indeed shift their focus towards corporate NCDs (non-convertible debentures) besides SDLs (state development loans, instruments issued by various state governments),” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

“This could potentially lower borrowing costs for corporates if there is increased demand for their debt securities,” he added.

Adding to this, V. Ramachandra Reddy DGM - Head Treasury, The Karur Vysya Bank said March being the dry period for government securities supply, funds will look for high quality corporate papers.

The government borrowing programme was completed on February 16. At the last gilts auction, the Reserve Bank of India (RBI) set a cut-off yield of 7.0464 percent on the 7.33 percent bonds maturing in 2026.

Similarly, the central bank set a cut-off yield of 7.1172 percent and 7.1421 percent on 7.18 percent 2037 bonds and 7.25 percent 2063 bonds, respectively.

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Yield movement

Since February 1, yields on corporate bonds have risen a marginal 1-2 basis points (bps) on three-year and five-years papers. However, 10-year corporate bond yield fell by 2 bps. One basis point is one-hundredth of a percentage point.

The yield on three-year corporate bonds were trading in the range of 7.75-7.76 percent, and of five year paper at 7.64-7.67 percent on February 16. On February 1, the three-year corporate bond yield was at 7.70-7.74 percent and for five years at 7.63-7.65 percent.

The 10-year corporate bond yield, on the other hand, fell to the 7.58-7.60 percent range on February 16, from 7.61-7.62 percent seen on February 1.

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Will there be more corporate bond issuances?

Money market experts are of the view that banks and companies are expected to tap the market in the remaining days of this financial year for their working capital and funding needs while also availing the better pricing in the absence of government borrowing.

However, whether they tap the market will depend on factors such as their funding requirements, market conditions and investor appetite. “As such, we expect few large banks, infrastructure companies, InvITs (infrastructure investment trusts), large PSUs and NBFCs (non-banking financial companies) will try and tap the bond market by March end,” Srinivasan added.

"Banks have continued to tap the market on a regular basis so we might not see any surprise surge in issuances,' said Ajay Manglunia, managing director and head of investment group at JM Financial.

On February 14, Moneycontrol reported that fundraising through corporate bonds so far this financial year had risen 21 percent over the previous year to Rs 8.08 lakh crore, according to data from PRIME Database, the National Stock Exchange, and BSE electronic bidding platforms.