India Inc turn to banks as bonds become expensive

With bonds becoming expensive, companies are deferring their plans to raise funds from debt market and preferring to tap banks for funds where lending rates have started coming down.

"With banks cutting lending rate situation has reversed. Bonds yields are now headed towards 8 per cent making resource raising through bonds expensive. Therefore, companies are deferring plans," said Abhishek Upadhyay, Economist, Fixed income strategy at ICICI Securities Primary Dealership.

Companies are now looking up to banks for funding needs, he added.

In the last one month, bonds prices have started coming down while yields have gone up. Bond yields have moved up by up to 0.20% in the last one month.

The yield on a bond is inverse to its price and is generally the par value of a bond divided by the interest. At the time of purchase, yield on a bond is equal to the interest rate, but changes as per the movement of rates.

The experts said the trend of companies moving away from bond market has been triggered by rate cut by banks and the hardening of yields across the globe.

Steel Authority of India (SAIL) and GIC Housing Finance are among the companies that are said to have deferred their plan for raising funds through bonds.

Bonds rates are expected to firm up further in anticipation that the US Federal Reserve will raise rates. Therefore, rising yields is quite natural across all emerging nation including India, said Jagannadham Thunuguntla, Head of Fundamental Research Karvy Group.

On Fed rate, Upadhyay said, "Bond market has already factored in the rate hike in September or a little later. However, the pace at which rate hike will come is uncertain."

So bond market activity is expected to be muted in the next few months, he added.

Bond yield crossed 8 per cent mark on Friday, he said adding that a clear direction would be known after RBI's next monetary policy review, scheduled for June 2.

The RBI in its last review, announced on April 7, kept policy rate unchanged awaiting clarity on impact of unseasonal rains on food inflation.

The repo rate, at which RBI lends to the banking system, left unchanged at 7.5% and the cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4%.