While everyone’s attention has been focussed on the action in the stock market, the Indian bond market has been warming up on the quiet.
A total of 6,896 new bond offers hit the market in the six-month period ending September2014, more than double the number of issues in the same period last year.
The total amount mopped stood at ₹1,79,282 crore (13 per cent more than the same period last year). Corporates seem to have switched from bank borrowings to the bond market to meet some of their funding requirements. Data from the RBI show that bank credit extended to industries grew only 6 per cent in the latest quarter, over the corresponding period last year. This is far lower than the 18 per cent growth in the July-September 2013 quarter.
Why do companies prefer to borrow from the bond markets rather than banks? It is purely a function of costs. Market borrowings today come at cheaper interest rates than bank credit, explains Karthik Srinivasan, Senior Vice-President and Co-Head, Financial Sector Ratings, ICRA. “Banks haven’t reduced their base rates. They still hover at 10-10.5 per cent. Last week, a few banks had cut their deposit rates but their base rates are still over 10 per cent. Today, an AAA-rated company is able to raise funds at 9 or sub-9 per cent for five years (in the bond market). That’s a clear 1-1.5 percent saving for the borrower”.
So, does the surge in bond issues suggest that companies are resuming their capital investments? No, say market watchers. In the corporate sector, it is auto and auto ancillary companies, apart from NBFCs, that have been raising capital and not the big infrastructure players. Trading volumes in the bonds segment of the secondary market have also gone up sharply. In September and October, turnover crossed ₹1,17,000 crore and ₹92,000 crore, respectively. These levels were last seen in July 2013, before the RBI increased rates.
Market watchers attribute this to two factors: the expectation that bond prices will rally once interest rates fall and a revival of interest in debt mutual funds, which trade actively in this market.
Mariam Mathew, Associate Vice-President & Head, Chola Securities, thinks that the recent bond price gains are the reason for the increase in trading in the secondary bond market.
Rajesh Iyer, Head, Investment Advisory Services and Family Office, Kotak Wealth Management, says: “The secondary market action has a direct correlation with expectations on bond yields. Further, as money is now coming back into debt mutual funds, there is increased action in the secondary markets.”