June 03, 2012 / 09:31 IST
Saikat Das
Moneycontrol.com
The country is likely to see fewer bond issuances by companies this financial year because of the prevailing stagflation and high government borrowing, says Arvind Konar, head-fixed income, Almondz Global Securities. Stagflation is when inflation remains high despite a slowing economy.
"Huge government borrowing will crowd out private players unless RBI helps infuse liquidity through continuous OMOs (open market operations). Secondly, overall economic slowdown coupled with policy paralysis and high cost of funds will act as a deterrent for private companies to tap the bond market," Konar told
Moneycontrol.com in an interaction.
Between April and September, 2012, the government will sell bonds worth Rs 3.70 lakh crore (gross) out of its budgeted target of Rs 5.69 lakh in FY13. It had gross-borrowed around Rs 5.10 lakh crore in FY12.
The government needs money to support country’s growth. The huge borrowing plan sucks liquidity from the system for the time being. The Reserve Bank of India tries to pump in liquidity back into the system by buying back government securities through open market operations (OMOs).
The way ahead for bond market in FY13...Bond market, according to Almondz’s Konar, depends on macro economic situation which is currently facing a lethal cocktail of stubborn inflation, fiscal deficit, lower than expected GDP growth and rupee depreciation (against the US dollar).
"Inflation will remain high due to supply side issues despite lower than expected GDP growth. This will restrain RBI from cutting policy rates unless there is significant fall in commodity prices including crude oil," said Konar.
Bonds as an investment bet...Equity market continues to be volatile with no future direction. Obviously, investment in bonds assumes importance. In the current scenario tax-free bonds (where interest income is tax free) of highly rated corporates like Power Finance Corporation, Rural Electriciton Corporation, IRFC, NHAI and HUDCO are good bets, suggested the fixed income head with more than 15 years of experience.
In the Union Budget 2012, the government has allowed those companies to mop up Rs 60,000 crore (as against Rs 30,000 cr a year back) through tax free bonds. Issues are expected to hit the market in the second half (Oct-March) of 2012-13.
On NCDs by gold loan companies...Gold loan companies are facing the heat of increased borrowing costs. Due to regulatory tightening, they will get less bank loans. Instead, they will have to depend on bond market.
"In this situation, they may have to go some extra miles to convince investors for subscribing their non-convertible debentures (NCDs). Their cost of borrowing from the bond market is expected to increase further in FY13 resulting in contraction of net interest margin," he said.
On corporate fixed deposits...Fixed deposit schemes issued by branded companies with good credit ratings will be able to raise money from the market. The offer relatively higher rate of interest compared to bank FDs.
Outlook for interest rates..."Persistent high inflation, tighter interbank liquidity, huge Govt. borrowing will keep interest rates at elevated level. Unless growth slows down further due to domestic and external factors, it will be difficult for RBI to keep on loosening monetary policy," commented Konar.
While RBI cut policy rates by 50 basis points in April, Commercial Paper (CP) and Certificate of Deposit (CD) rates have gone up since then. For instance, three-month CD rate increased from 9.25% on April 17 to around 9.70% in end May. During the same period month CP rate rose from 10% to 10.50%.
saikat.das@network18online.com 
