Mumbai: A reluctance among investors to pick up long-maturity bonds has forced infrastructure firms, the key issuers of such debt, to raise money at higher rates or resort to shorter bonds to cut costs, merchant bankers said.
Uncertainty over the government’s borrowing programme and the resultant impact on federal bond yields is deterring investors from buying long-term debt that carry a higher interest rate risk, they added.
“There is a definite feeling that as we go on in the year, interest rates will go up. Also, companies are looking to avail of the comfortable liquidity conditions in the market right now,” said Siddharth Rath, senior vice-president (capital markets), at Axis Bank Ltd.
Infrastructure firms are dependent on debt for funding because of the huge capital investments required. Interest rates have been falling since October, increasing the appeal, as the Reserve Bank of India cut its short-term repo rate by 425 basis points since then.
But a revival of economic activity, fuelled partly by the government’s spending plans, has led to expectations that the easy monetary policy stance may be reversed to stem inflation and the government may borrow more to fund its expenditure.
In its interim budget in February, the government had targeted Rs3.6 trillion of borrowing for the year, and will finalize the borrowing figure when it presents the final budget on 6 July.
In recent weeks, infrastructure lenders such as Indian Railway Finance Corp. Ltd (IRFC) and Rural Electrification Corp. Ltd (REC) have opted for either shorter-term bonds or paid a higher coupon for bonds.
REC, a state-run company funding rural power projects, placed 10-year bonds with state-run Life Insurance Corp. of India to raise Rs2,000 crore at 8.8%, a slight premium to the company’s secondary market yield of 8.7%.
IRFC, the funding agency of the Indian Railways, rejected bids for 15- and 20-year bonds because of poor response to these bonds, retaining Rs500 crore of 10-year bonds.
“Demand is limited for sure. Demand for long-term bonds comes mainly from the insurance sector and even over there, it is dominated by a few large companies,” said Kaustubh Kulkarni, director, capital markets, at Standard Chartered Bank Plc.