Domestic corporate bond issuances rise to all-time high in FY23 as overseas borrowing gets costlier

“Also, given the market volatility globally and tightening monetary policies, the overseas bond issuances moderated and corporates had to tap the domestic market to raise funds,” Mehta added.

Vivek Ramakrishnan, vice president, investments, at DSP Mutual Fund, said there was replacement of retiring bonds, higher bank loan rates made corporate bonds attractive in certain pockets, large issuances by certain issuers and finally, the return of growth momentum in both the corporate and retail sector.

What does data say?

In the last 10 years, FY21 recorded the previous highest issuances, worth Rs 7.51 lakh crore, followed by FY17 at Rs 7.07 lakh crore, data showed.

In FY23, Housing Development Finance Corporation Ltd, National Bank for Agriculture and Rural Development (NABARD), Power Finance Corporation, State Bank of India, Small Industries Development Bank of India, LIC Housing Finance, REC, HDFC Bank, Indian Railways Finance Corporation and Bajaj Finance were the top 10 issuers.

The consolidated funds raised by these companies comprise over 44 percent of the total amount raised.

The consolidated amount raised by HDFC Bank and HDFC by themselves was over Rs 1 lakh crore.

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Rate movement

The yield on the corporate bonds in the secondary market have inched up sharply after the Reserve Bank of India (RBI) started hiking its policy rate since May to fight higher inflation.

The three-year paper that was trading between 5.80 and 5.85 percent on April 4, 2022, was seen trading in the range of 7.60-7.70 percent on March 31.

The five-year paper yield moved from 6.35 percent in April 2022 to 7.70 percent in March 2023, and the 10-year paper yield moved up to 7.80-7.85 percent from the 7.05 percent range before the rate hike cycle began.

The central bank started hiking the repo rate since May, and till now has cumulatively raised it 250 basis points (bps) till the February monetary policy review, before maintaining status quo in April.

After the pause, yield on corporate bonds started to ease, tracking the yields on government securities (G-secs).

“This rate pause by the RBI did indeed catch the market by surprise, and was a reaction to the emerging global credit situation. Hence, the next step will move into data dependency,” Ramakrishnan said.

Before the announcement of April monetary policy, yield on the 10-year benchmark bond was trading at 7.28 percent, and fell to as low as 7.12 percent. Currently, the yield on the 10-year benchmark 7.26 percent 2032 bond is trading at 7.22 percent.

Further, the rate hike by global central banks due to record high inflation in developed countries also made overseas borrowings of these companies costlier. Also, the depreciation of rupee put pressure on the overseas borrowings, money market dealers said.

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Outlook

Money market dealers said that going forward, the garnering of funds will become difficult due to recent change in tax norms in debt mutual funds. This is because mutual funds play an important role in deploying funds in these instruments.

Due to this, yields on corporate bonds will face the heat and may remain under pressure. However, any southward movement in yield on G-secs will cause corporate bond yields to ease, dealers said.

“It will be difficult to keep the same pace of issuances given the recent taxation changes for debt mutual funds,” Mehta said.

“Given the developments on taxation for MFs and insurance, the demand in certain pockets by these investors could be affected in the likely case that industry growth will slow. Hence corporate bond spreads will likely remain elevated, and attractive for longer-term investors,” said Ramakrishnan.