Mumbai: Indian firms prefer to stay on sidelines this week with no fresh debt issues expected, on concern the central bank may tighten its monetary stance further to rein in 13-year high inflation.
Indian inflation shot above 11% in early June following a rise in state-set fuel prices, prompting the finance minister to warn of stronger anti-inflation measures ahead.
“Companies have no choice but to hold back, investors who were quoting rates at about 9.5% last month, are today asking around 10.20-25%,” a merchant banker with a leading debt brokerage firm said.
The Reserve Bank of India on 11 June unexpectedly raised its key lending rate by 25 basis points to 8%, to contain inflation expectations, but left all other rates unchanged.
It has also raised the banks’ cash reserve ratio (CRR) by 75 basis points to 8.25% so far in 2008, and analysts expect further increases in both the key overnight rates as also the CRR to tame rising price pressures.
This would increase borrowing costs and companies are waiting for market conditions to stabilise before entering the market, bankers said.
Tight cash conditions also weighed on potential issuers as they would have to shell out higher interest rates, they said.
The central bank infused Rs387.30 billion at its daily money market operations on Tuesday, more than seven times on the same day last week, indicating the extent of the cash crunch in the banking system.
Overnight cash rates, a barometer of cash supplies in the inter-bank money market, were quoting at 8.20/8.25%, much above 6 percent levels, when cash is ample.
High inflation is also pushing investors to demand a higher risk premium for buying bonds. Companies are paying a coupon which is higher by nearly 70-90 basis points from rates in January, merchant bankers said.
Dealers said cash conditions will continue to remain tight for some time as the central bank is continuously sucking out rupee liquidity by selling dollars in the foreign exchange market to keep the rupee stronger than 43 per dollar.
The central bank sold Rs60 billion worth of bonds on 20 June, which further drained cash from the system.
According to stock market regulator data, private placement of corporate debt in the first four months of 2008 was Rs430.41 billion compared to Rs1.17 trillion in 2007.