Indian companies are finding it too expensive to sell local-currency bonds after central bank governor D. Subbarao raised interest rates seven times in a year, spurring relative yields to the highest since October 2009.
Rupee bond offerings plunged 95% to Rs100 crore ($22 million) in the week ended 4 February, from Rs2,100 crore in the same period last year, according to data compiled by Bloomberg.
January sales were the lowest for 15 months as Subbarao increased the repurchase rate to a two-year high of 6.5%, forecasting wholesale-price inflation may rise to 7% by March 31 from a prior 5.5% estimate.
“The current rate environment doesn’t give much confidence to long-term investors,” Suresh M. Hegde, group finance head at Videocon Industries Ltd, India’s biggest consumer electronics maker, said in a phone interview on Monday. “They’ll wait till inflation is under control and rates start to soften.” Bond sales jumped to a record Rs1.94 trillion last year as borrowers raised money to finance airports, power plants and roads in Asia’s third-largest economy.
The difference between yields on top-rated five-year company bonds and similar-maturity government debt has since widened to 130 basis points, or 1.3 percentage point, the most since it reached 131 basis points on 9 october 2009.
The spread is 84 more than last year’s low amid speculation Subbarao will need to raise rates further.
Five-year funding costs in rupees for top-rated companies were last at 9.34%, the highest since December 2008, according to the Fixed Income Money Market and Derivatives Association of India. China’s interbank corporate bond rate was 4.99%, data compiled by Bloomberg show.
“Spreads will widen more,” said Mahendra Kumar Jajoo, who oversees Rs2,000 crore of assets at Pramerica Asset Management Pvt. Ltd in Mumbai. “Investors will expect yields to rise and so won’t trade now.”
Videocon, led by billionaire Venugopal Dhoot, sold $200 million of 6.75%, five-year convertible bonds at par in December, according to data compiled by Bloomberg. The notes traded at 91 cents on the dollar to yield 9.082% on Tuesday, the highest yield since the sale, according to Cantor Fitzgerald Hong Kong prices.
Larsen and Toubro Ltd, India’s biggest engineering company, has Rs7,070 crore of bonds due to mature through 2020, including Rs1,100 this year, data compiled by Bloomberg show. Its Rs400 crore of 9.15% bonds due in 2019 yield 9.5% after falling below par value last month, according to Jammu & Kashmir Bank prices. “It’s definitely hurting to sell rupee bonds,” R. Govindan, Larsen and Toubro’s head of treasury, said in a phone interview from Mumbai on Monday. “Companies will be focused on generating cash internally to fund projects.”
The government predicted on Monday that the $1.3 trillion economy will expand 8.6% in the year ending 31 March, the fastest pace since 2008. The central bank’s monetary policy stance remains anti-inflationary, deputy governor Subir Gokarn told reporters in New Delhi.
“Political unrest in Egypt will add an element of risk to crude oil prices,” he said a day earlier, fanning inflation in the South Asian country that depends on imports to meet 75% of its annual energy needs. “A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices, and that is something which we didn’t anticipate at the time of making the policy announcement on 25 January,” Gokarn said in Dabolim, Goa.