HomeFinanceBanks, companies rush to bond market to lock lower rates

Banks, companies rush to bond market to lock lower rates

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By Manish M. Suvarna

Fundraising by companies and banks from the bond market has increased sharply in the last two weeks as they are looking at locking in lower rates in anticipation of the Reserve Bank of India’s (RBI) policy in December. The market expects the central bank to announce liquidity-tightening measures which will increase borrowing cost in the coming days.

Additionally, market participants also expect that the RBI could increase the reverse repo rate and make the repo rate an operational rate. Usually, most issuers remain on the sidelines and wait for the policy decision, but this time the trend seems to be reversing. However, the activity in the secondary market of corporate bonds is on hold as market players are trading in a thin range.

In the last two weeks, according to data compiled from the BSE and NSE bidding platforms, companies and banks together raised Rs 36,747 crore, of which housing finance companies have a major share of Rs 14,190 crore. Banks and non-banking finance companies (NBFC) raised Rs 9,092 crore and Rs 9,828 crore, respectively, so far.

“Most of them are trying to lock the lower interest rate that is currently available in the market as they expect liquidity to tighten considering RBI’s intentions to keep lower surplus liquidity in the banking system, which will eventually have an impact on the interest rate,” said Karan Gupta, director – financial institutions, India Ratings and Research.

The yield on corporate bonds across ratings in the secondary market is trading between 5.35% and 5.45% on three-year papers, 5.62-5.75% on five-year papers, and 6.78-6.88% on 10-year papers.

Market participants expect the RBI to continue with its liquidity normalisation tool viz variable rate reverse repo (VRRR) to bring liquidity lower which is currently in huge surplus and bring the reverse repo rate to 3.75%. The RBI is also withdrawing liquidity by selling sovereign securities worth Rs 1,435 crore in the last two weeks in the secondary market, which sucked out a part of the liquidity from the system. Currently, the liquidity in the banking system is estimated to be in a surplus of around Rs 8.58 lakh crore.

In its October policy, the RBI had announced 14-day VRRR auctions of Rs 6 lakh crore and had an option of 28 days VRRR auctions. The RBI’s monetary policy committee is schedule to meet on December 6 and the decision will be announced on December 8.

The reverse repo rate hike is expected in two steps considering the new virus variant. Usually, the corridor gap between the repo and reverse repo is 25 basis points, but now it is around 65 basis points. It was widened during the pandemic to make borrowing cost lower. “We expect the reverse repo to be recalibrated to 3.75% till February policy. We expect the glide path in VRRR to continue,” said Sandeep Yadav, head of fixed income, DSP Mutual Fund.

Apart from this, dealers with brokerage firms and mutual funds pegged the central bank to keep the repo rate unchanged and maintain an accommodative stance.

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