Corporate bond issuance improves with clarity on interest rates

Private placement of corporate bonds rose to a three-month high in October as clarity on the interest rate front improved.

As per data released by the Securities and Exchange Board of India (Sebi) on Monday, firms raised Rs16,628.34 crore through this route in October, up from Rs15,738.74 crore in September and Rs13,380.13 crore in August.

“There was more clarity on the interest rate front in September and October compared with August. So the amount raised by way of corporate bond issuances increased slightly,” said Sandeep Mahajan, head of debt and capital market, RR Investors Capital Services.

In a rising interest rate scenario, investors turn away from medium to long-term bonds because the price of bonds fall with interest rates hikes. In October, the market had factored in a further 25 basis points (bps) hike in key policy rates in the second quarter review of the monetary policy for 2010-11 held on November 2.

The market also felt that after the November 2 hike, the RBI may opt for a pause in rate hike at least for some time.

RBI governor D Subbarao said on November 2, “For the immediate future rate action is unlikely barring some shock from both domestic and external sides. The immediate future will translate to about three months. I am not ruling out any action in December or January, but we believe that unless there is some unforeseen development, we will refrain from action.”

But due to the series of rates hikes, the cost of borrowings has gone up every month for firms. “The cost of borrowing went up by 10-15 bps for a 5-year paper and by 5-10 bps for a 10-year paper in October compared with September,” said Arvind Konar, head of fixed income, Almondz Global Securities. Konar feels the cost of borrowing will go up by another 5-10 bps in the near term.

The amount raised in the next couple of months may not be very significant as most of the firms had front-loaded their borrowings in the first half of this fiscal.

“We may not see many issuances in the next few months. But in the fourth quarter, the issuances might improve. This is because inflation is expected to come under control and liquidity will be better,” said Ajay Manglunia, senior VP, Edelweiss Securities.