India’s dark corporate debt market now loses the flicker of liquidity too

Corporate bonds are like that old gadget or furniture that lies around the house because no one wants to buy it from you. Even if you refurbish corporate bonds by marking down their value or even adding an attractive new clause, buyers are unwilling to bite because exit down the line is difficult. The market for corporate paper in India scores abysmally low given that trading in most bonds is negligible. The onerous exit that is inherent in every corporate paper makes it difficult for all entities.

Short-term commercial papers fare slightly better but secondary market trades are nothing to write home about most days.

These are unfortunately old issues that have never been fixed and bond investors from insurance companies to mutual funds and even banks have made do with a fractured and opaque corporate bond market.

But this darkness is scarier during times such as the present when a lone entity defaults.

That is at the crux of what seized up money and corporate bond markets when Infrastructure Leasing and Financial Services Ltd began to default on its repayments and the sale of bonds of Dewan Housing Finance Corp. Ltd by a mutual fund at a deep discount threatened the sanctity of its rating.

The malaise is deep now with the volume of trades in corporate bonds and even for short-term commercial papers plummeting sharply. Data from the Clearing Corporation of India Ltd shows that the weekly average trade volume in commercial papers last week was about ₹ 5,600 crore, a drop from around ₹ 7,000 crore two months ago. Corporate bond trades are even thinner.

The price of raising money by issuing commercial paper has been rising for the past three months because money available to put in these has been scarce due to tightening liquidity.

Banks have been net borrowers from the Reserve Bank of India (RBI) and have borrowed close to ₹ 1.5 trillion from its various liquidity windows. Hostile bond markets have meant that mutual funds are facing redemptions in their debt funds. Hence, money to spare for companies seeking working capital through commercial papers is scarce.

But the pressure on interest rates is even more now because of the added fear of default. Granted, not even AAA-rated paper is viewed under the same lens in the corporate bond market. Even so, bond investors are jittery that the top-rated paper they hold is not worth the letters of the rating it brandishes.

The key to remove this gridlock is to assure markets that securities are indeed fungible and that there is an easy exit available. That means going back to the drawing board to examine how liquidity in the secondary market can be increased.

Meanwhile, a quick fix to soothe nerves can be a special window where RBI can offer assistance to make securities easily fungible.