After a brief break in the September quarter, companies may flock back to corporate bond market soon
The effervescent start to the fiscal year did not last for corporate bonds. Sales plunged in the September quarter, as yields jumped. But the downturn may be about to end, say merchant bankers.
The wave of corporate bond sales in the first quarter ebbed in the second as borrowing costs rose, but bankers expect the lull to reverse soon as falling yields revive the bond market's lure.
Corporate bond sales in the September quarter plunged to ₹2 trillion from ₹3.44 trillion in the June quarter and ₹3.2 trillion a year earlier, primedatabase.com figures showed. The decline came alongside a rise in yield on the 10-year bonds of National Bank and Agriculture and Rural Development, considered a benchmark in the corporate debt market. The jump in the Nabard bond yield by 18-20 basis points to 7.24% was in line with the 10-year government bond, where the yield rose 20 bps to 6.50%.
The change reflects the ongoing monetary policy transition, market supply pressures and shifting investor preferences amid heightened economic uncertainties.
Harder yields
"Yields had hardened, and then there was a whole lot of uncertainty in the geopolitical environment. It had become so volatile that it wasn't possible for some of the players to take on further debt," said Killol Pandya, head of fixed income-debt at JM Financial Asset Management Ltd.
The September quarter rise in yield was a reversal from the 25 bps fall since early February, when the Reserve Bank of India began its interest rate easing cycle.
A weaker macroeconomic environment also depressed bond sales, Pandya said, worsened by a seasonal tightening of liquidity typical of the quarter-end and half year-end.
"The Reserve Bank of India's change in stance to neutral from accommodative created uncertainty about the future rate trajectory and dampened issuer confidence, with many preferring to wait for clearer signals before locking into long-term borrowing costs," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP.
Govt borrowing
Borrowing by central and state governments also crowded out corporate bonds. "State development securities offered wider spreads with zero credit risk, diverting institutional demand away from corporate papers, especially in the long-tenor segment," Srinivasan said.
The last time corporate bond sales were at their lowest was in the September quarter of FY24 at ₹1.75 trillion.
However, things may change soon. Pointing to a recent fall in yields, RBI governor Sanjay Malhotra said last week that the RBI was confident they would fall further, igniting hopes of a rate cut in December. "While there is scope for more, we feel that it (10-year government bond) should head downwards and a number of measures have been contemplated in this regard, including how primary G-Sec auctions will be held, the tenor of these government offerings not only central government but also state government," he said.
Bright future
Falling yields are expected to make the corporate bond market attractive again. India's steady growth in a turbulent world is also expected to aid corporate decision-making.
"Yields are also coming down a little bit, all because of liquidity improvement, RBI monetary policy giving all positive comments, and the credit offtake environment seeing an improvement. We are not slowing down after all, but we are managing well; so, the sentiment has also changed," Pandya said.
Clarity on the domestic economic environment and reduction in goods and services tax rates will drive growth for some companies, a senior debt merchant banker said, adding some of the indecisive issuers will start returning to the market.
"We expect issuances to rebound this quarter, led by NBFCs amid festive-season lending momentum and a rise in short-term corporate paper," Soumyajit Niyogi, director at India Ratings and Research said.
- Corporate bond sales fell in Q2 as benchmark yields hardened, reflecting higher borrowing costs.
- Increased market uncertainty and RBI's neutral stance stalled issuer confidence for long-term borrowing.
- Government borrowing crowded out corporate papers, with state securities offering better, risk-free returns.
- Expectations of falling bond yields and improved liquidity suggest an imminent revival in corporate issuance.
- NBFCs and short-term papers are anticipated to lead the bond market rebound amid festive season demand.
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