New Delhi: Indian companies, which are increasingly turning to a liquidity-flush domestic debt market for funds, may find that window drying up as the government mops up money through its already bloated borrowing plan.
A series of interest rate and cash reserve ratio cuts as well as bond buybacks by the Reserve Bank of India (RBI) has left the system flush with cash and yields comfortably low, encouraging companies to borrow through bonds.
But the Union government, struggling to boost economic growth amid a global slowdown, is resorting to heavy bond sales to bridge a widening deficit, triggering fears that it may crowd out private debt investments.
“Companies are managing (despite heavy government borrowing) due to the liquidity situation. As the government borrowing progresses....the condition won’t remain the same,” said Siddarth Rath, senior vice-president, capital markets, Axis Bank Ltd.
Indian companies have raised Rs1.51 trillion via bonds between October and March, according to Securities and Exchange Board of India, to take advantage of lower yields.
The yield on the Reuters benchmark five-year corporate bond has come down to 7.50-8% levels from 11% in September, before the central bank began lowering rates.
Indian Railway Finance Corp. (IRFC), a key seller of corporate bonds, has seen its cost of funds shrinking to 8.05% from 8.98% in 2008, R. Kashyap, managing director, told Reuters in an interview on 15 May.
Since October, the RBI has cut its key lending rate by 425 basis points and cash reserve requirements by 400 basis points to negate the effect of a global credit crunch and recession.
The government, on its part, has cut factory gate duties and committed additional expenditure, widening its 2008-09 fiscal deficit to 6% of GDP from the budgeted 2.5%, triggering concerns it will lead to higher cost of funds.
It plans to sell Rs2.4 trillion of bonds by September, which is two-thirds of the annual target.
Earlier on Tuesday, finance secretary Ashok Chawla told reporters finance ministry and central bank officials will meet on Saturday to discuss revising June’s borrowing target from the scheduled Rs48,000 crore between 29 May and 26 June.
“... with every percentage point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes much more difficult...,” RBI governor D Subbarao said last week.
Some economists say the impact of heavy borrowing on corporate funding will be seen only in the absence of alternate sources of money such as equity or overseas loans.
“If other sources are not there and the government comes out with heavy borrowing programme and it frontloads, then it may have some impact,” said Vibha Batra, ICRA’s co-head financial sector ratings.
A few companies, which routinely tap the domestic bond market for money, are also looking elsewhere for funds as the government’s relentless borrowing threatens to send yields up.
State-run Rural Electrification Corp’s (REC) , which plans to raise about Rs30,000 crore through different sources in 2009-10, may look overseas for fund-raising, finance director HD Khunteta said.
“We don’t see any difficulty in raising the resources. We have the approval for $500 million ECB also,” he said.
However, Crisil’s economist DK Joshi believes the government’s heavy borrowing will not be an issue in the near-term as liquidity is “decent” in the system and the RBI is taking measures to pump liquidity by buying back bonds.
“Right now the crowding out may not take place, but once the economy starts recovering, it will become a central issue.”