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Banks face bond mart pressure to cut rates

With bond yields just 4-5 basis points above the repo rate, corporates are shunning bank credit and raising money in the debt market

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Banks will have no option but to reduce interest rates. The rate fall in the bond market is forcing companies to raise money in that market and repay their costlier bank credit. If the demand for bank credit is diverted to the bond market, banks may be forced to bring down their base rates and the short-term rates.

For example IDBI Bank on Thursday reduced base rate from 9.75% to 9.65%, benchmark prime lending rate (old benchmark rate - BPLR) from 14.25% to 14.15% and reduced its deposit rates by 0.10% to 0.25% in select classes.

A money market dealer said, "The bank rates cannot be immune to the fall in the money market rates. They will have to align it to the debt market rates." The sluggish growth in bank credit which is just hovering around 8% during the year is forcing banks to deploy their excess money in the corporate bonds.

A chief dealer with a private sector bank said, "Leading AAA-rated companies are raising money about four to five basis points above the repo rate -- which is at 6.5%. Companies are converting their credit limits to debt limits with the same banks are investing into it. Even those with AA-rating are able to raise money from the debt market over 1% lower than the bank credit."

Reliance Jio raised Rs 500 crore at 6.54% for two months from the market, while Apollo Tyres raised Rs 200 crore at 6.54%. Some of the others who have tapped the bond markets are Tata group companies (Tata Power and Tata Realty), HDFC, Capital First and Bajaj FinServ.

Arundhati Bhattacharya chairman of State Bank of India (SBI), told dna, "Normally as yields fall, treasury profits help us bring down rates. However, with marginal cost-based lending rate (MCLR), the rates are closely linked to the deposit rates. So deposit rates will need to come down."

The Federal Open Market Committee (FOMC), which decided to leave the US interest rates unchanged, is expected to keep the Indian bond and currency markets buoyant in the near term as high yielding Indian assets continue to be attractive for foreign investors. Further, a quantitative easing expected from the Bank of Japan is likely to bring in additional liquidity into the Indian bond and equity markets which is, in turn, expected to bring down rates further.

Ashutosh Khajuria, executive director, Federal Bank, said, "Liquidity in the bond markets is comfortable and before the FOMC meeting, rates had remained tight anticipating an interest rate reversal. But after FOMC maintained status quo, the rates have started falling. In fact, they may fall further by another 10 basis points."

A chief dealer at a public sector bank said, "The 10-year benchmark bond yield fell six basis points to 7.19% on Thursday, which is close to the lows seen in 2013. We would not be surprised if the yields fall below 7% on the back of surplus liquidity. Foreign investors are there in the market both in the debt and equity market."

India Ratings said in a report that the 10-year benchmark government bond yield dropped to 7.21% in early trade on Thursday -- lowest in over three years, on the back of strong foreign portfolio investor interest. "Since the start of July 2016, post the increase in the debt investment limits, foreign portfolio investors have bought G-secs worth net Rs 8,100 crore. On the other hand, the reined-in volatility in the rupee also enhances the attractiveness of Indian assets among other emerging markets," the ratings agency said.

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