RBI Steps may Help Local Bond Market
increase in policy rate seen as a positive Shilpy Sinha Mumbai: Companies that either scaled back domestic bond issues or withdrew them altogether due to high yields might return to the market after the central bank's suite of weekend measures expectedly provides some cushion to the rupee, analysts said. Since overseas yields show few signs of abating and the cost of hedging escalates amid a firming dollar, borrowing choices for Indian companies have suddenly narrowed, they said.
Banks remain one of the options, but the local bond market might find immediate favour after the latest increase in policy rates-especially for smaller issues. "Some issuers that cancelled bond offerings earlier because yields were higher than their bank borrowing costs may return to the market now," said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. "However, they may not necessarily accept the entire issue amount and could choose to accept bids only up to a level of yield they are comfortable with." The gap between bond yields and bank lending rates varies by borrower rating and loan structure, but rising borrowing costs could make bond issuances more competitive for some companies.
A large bank's external benchmark-linked lending rate (EBLR) is 8%, with even top-tier borrowers typically paying a spread of 200-300 basis points. By contrast, five-year bonds issued by AAA-rated quasi-public sector companies offer indicative yields of around 7.90%. Bonds may also offer cash-flow flexibility, as bank loan interest is generally payable monthly, while bond coupons are often paid annually or semi-annually, depending on the terms of the issue.
This could make bond funding more attractive for eligible companies seeking to manage near-term cash outflows. The RBI's intervention could therefore help contain currency volatility without changing the funding outlook much. A sustained revival in overseas issuance would require more competitive global borrowing costs and greater certainty over the rupee.
The RBI has opened a special dollar window for Indian Oil, Bharat Petroleum and Hindustan Petroleum to meet their daily foreign currency requirements from Monday, diverting their dollar demand from the open market.
The move comes as the rupee remains near record lows and crude oil prices stay above $100 a barrel. External commercial borrowings could continue where companies secure investors within applicable regulatory limits. However, ECBs and foreign currency bond issuances would depend heavily on international market conditions and investor demand.