Category: Bonds

Bond yields in focus as RBI lifts FPI limits

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bond yields will be in focus as the Reserve Bank of India (RBU) hiked FPI limits last week.

At the moment, foreign investors can buy up to 5% of total outstanding securities. The RBI has increased thisto 5.5% for the current year and 6% for the following year.

#BondCall | The 7.17%, 2028 bond yield is likely to trade in the range of 7.12-7.18% today, says Ajay Manglunia of Edelweiss pic.twitter.com/skw9sjzpaZ

— CNBC-TV18 (@CNBCTV18Live) April 9, 2018

This change means that FPIs will be able to buy bonds worth Rs 59,000 crore more this year.

Latha Venkatesh said that the market was expecting this move to  be announced on credit policy day itself. It will be a minor positive as this move was largely factored in.

Nomura told CNBC-TV18 that it expects bond yields to stabilise at 7%.

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Reliance Commercial Finance raises Rs 500 cr on new BSE Bond platform

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Stock exchange major BSE said Reliance Commercial Finance (RCFL) has raised Rs 500 crore by issuing bonds on private placement basis using its Bond platform.

According to the BSE, this is the maiden issue on its Bond platform after the roll-out of the new Circular issued by market regulator Securities and Exchange Board of India (Sebi) on January 5, 2018, effective from April 1, 2018.

“On April 4, 2018, Reliance Commercial Finance Ltd successfully raised Rs 500 crore by issuing bonds on private placement basis using the new BSE Bond platform,” the BSE said in a statement.

Devang Modi, Executive Director and CEO, RCFL, said: “We are delighted that in keeping with the Reliance Group’s tradition of being involved with many firsts in India’s capital markets, Reliance Commercial Finance has become the first company today to issue bonds on the BSE Bond.”

“We are seeing a steady growth in our SME (small and medium enterprises) and retail financing business, and the proceeds from this private placement will help fund future growth,” he said.

The BSE had on July 1, 2016, launched the platform for Electronic Book Mechanism “BSE Bond” for issuance of debt securities on private placement basis and an amount of Rs 424,083 crore has been raised on the platform since inception.

“BSE firmly believes that Indian primary bond market is poised for substantial growth; India can use its domestic savings to fund its finance needs in a substantive manner,” said Ashish kumar Chauhan, MD and CEO, BSE.

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Fund-raising via NCD drops 83% to Rs 4,975 crore in FY 18

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Indian companies raised Rs 4,975 crore by issuing non-convertible debentures (NCDs) to retail investors in 2017-18 to meet their business requirements, a plunge of 83% from the preceding year.

In 2016-17, firms had mobilised Rs 29,558 crore through this route, according to latest data with the Securities and Exchange Board of India (Sebi).

Overall, in terms of volume, there were seven NCD issues in the recently-concluded fiscal as against 16 in 2016-17.

The companies raised money for funding expansion plans, retiring debt, supporting working capital requirements and other general corporate purposes.

NCDs are loan-linked bonds that cannot be converted into stocks and usually offer higher interest rates than convertible debentures.

Market analysts said fund-raising via NCDs was less compared to the preceding financial year as the companies preferred initial public offering (IPO) and qualified institutional placement (QIP) route to garner funds.

Companies mopped-up a record over Rs 84,000 crore through IPOs in last fiscal and more than Rs 62,000 via QIPs.

In the previous fiscal, Kosammattam Finance went for NCDs twice to mobilise capital and raised over Rs 443 crore.

Individually, Muthoot Finance raised a total of Rs 1,969 crore through this route against a target of Rs 200 crore, Mahindra & Mahindra Financial Services garnered Rs 1,150 crore against a base size of Rs 250 crore.

Besides, Srei Equipment Finance mopped-up Rs 562 crore against the base size of Rs 500 crore, Edelweiss Retail Finance raked in Rs 500 crore as compared to the target of Rs 250 crore and Srei Infrastructure Finance garnered Rs 351 crore against base amount of Rs 200 crore.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bond bulls to make merry for six months, though risks prevail

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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With the government reducing its bond borrowing in the first half of this financial year, the bond markets are making merry as their yields are seeing a peak.

Yields on benchmark government bonds dipped by 29 basis points to 7.33% on Tuesday, making it the biggest one-day fall since November 2013.

Rising bond yields lead to a rise in the opportunity cost of investing in other assets, including equities, making stock investments less attractive.

“Owing to this unexpected move, bond yields seem to have peaked, we expect the 10-year yield to correct by 15-30 bps in the coming days. Positive for the banks before the year-end closing,” a PhilipCapital (India) report said.

The Modi government announced it would sell only 48% of the planned annual bond sales, less than the 60-65% compared to previous years. The size of the annual debt sale was also cut by Rs 50,000 crore.

The government will do so by reducing bond buybacks and increasing its borrowing from the National Small Savings Fund (NSSF).

The move left the bond market high-spirited, with bulls coming in for the run.

The bond markets were seeing bearish behaviour until the announcement. This is because the government securities saw a weaker-than-normal demand from state-owned banks as they continue to face a large supply pressure, according to an IDFC report.

The IDFC report argued that the bond market feared the increase in the Foreign Portfolio Investment (FPI) participation owing to the change in the dynamics of global monetary policy.

The market, before the announcement, was only expecting the central bank to issue a larger portion of lower tenor securities instead of bunching up the 10-14 year tenor securities. The market, however, got more than what they wished for. The move points the introduction of a shorter – 1-4 years – tenor category.

“With this expectation being now met along with a reduction in the size of total issuance for FY19, one can expect a gap down in the 10-year yields tomorrow,” the IDFC report said.

Experts, however, warn that the jump in the bond market is temporary. An ICICI Bank report, analysing the previous trends, said that this move could have been made for the government to meet its spending requirements. This move will help the government raise tax revenues, as they typically begin to rise in the second half of the financial year.

“It is possible that the government issues cash management bills to meet expenditure requirements in the H1 (first half of the financial year) especially as there are strong redemption pressures, particularly in April-2018,” the ICICI Bank report said.

A Kotak Economy report warns that there is a possibility of risks emerging in the second half of the year. The report states three possible risks:

• Higher-than-usual borrowing in the second half, approximately 48% of the total.
• A possible shortfall in National Small Savings Fund (NSSF).
• A risk of fiscal slippage, that is, if the Goods and Services Tax (GST) revenues show a weaker trend in the first half which can result in higher borrowings by the State in the future.

Even though risks prevail, the short-term move will reap benefits for the bond market. The move will help the market balance the six-month pressure which it faced due to the rise in inflation and the economy’s fiscal position.

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Bond yield levels likely to settle around 7.25% in April, says Nomura

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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State-owned banks may book some profit on their bond portfolio, said Nomura’s Neeraj Ghambir.

He said that a mix of short and long-term bonds is a good idea and expects the bond yield levels to settle around 7.25% in  April.

The bonds yields, maturing in 2028, slipped to 7.35% versus 7.62%, its lowest since January 29. The bond yield levels – between 7.25% and 7.4%- indicate that the banks seemed to have adopted a buying strategy.

The government had announced on Monday, a lower-than-expected borrowing programme for the first half of the next financial year, unlike what was practised earlier.

The decision came amid rising yields and diminishing demand for government securities. The expert predicts a cut in the lending rates but says that the banks may wait for a month to implement the policy.

He said that primary dealers gave the government feedback to shift the bulk of borrowing to the second half.

Below is the verbatim transcript of the interview.

Latha: You expected 7.35 percent?

Gambhir: I think it is a fairly strong reaction. I was thinking maybe we will settle at around 7.40-7.45 percent because we were expecting some supply from public sector banks who have been waiting for some downtick in the market to realise some of the profits on their books. Let us not forget we are inching towards the end of the year, and there will be some pressure on them to book profits. So, I think, yes, intraday, but I feel that we will probably settle at around 7.40-7.45 for March 31 and then as the new year starts and we will start looking at the participation from these banks, and that will drive the market going forward.

Sonia: How much do you think the losses could reduce on an average for the banking portfolios?

Gambhir: It depends from bank to bank and at what levels they have actually accumulated. Our sense is that a lot of buying happened at around 7.40 percent, between 7.25 percent and 7.40 percent levels and after that I do not think the public sector banks have actually bought too much. So there will be some portfolio which will see some positive gains but overall because they are supposed to mark-to-market a large part of their book which is sitting in available-for-sale (AFS) and held-to-maturity (HTM), the portfolio as a whole will actually benefit quite a lot.

Latha: Overnight how much have bond losses come by for the industry you would say?

Gambhir: It is very hard to make the assessment. I normally do not do those numbers because a large part of the portfolio is in HTM, it is only the AFS and held-for-trading (HFT) portfolios which benefit from these things from an accounting standpoint.

Latha: What would you expect will be the trajectory in April? You see it going toward 7.25 percent or going towards 7.4 percent?

Gambhir: I think this a very deft management of borrowing strategy by the government. This is the kind of feedback that we as primary dealers gave to the government to manage the duration in the market using a combination of short dated bonds and floating rate bonds. Thankfully the government has listened to the market feedback.

I feel that the market was pricing in somewhere close to 50 basis points of rate hike over the next 12 months and on top of that there was about 50 basis points of demand supply mismatch sort of premium. Now my guess is that a large part of that 50 basis points demand supply mismatch premium will be taken out. So, I would expect the market to settle at around 7.25 percent in the month of April.

Also we have to basically navigate the next monetary policy which is in the first week of April, and the Reserve Bank of India (RBI) positioning and their views around the path of the monetary policy will be keenly watched. However, assuming they are on neutral mode or little hawkish, not too hawkish, I think 7.25 percent is the level which I will look at.

Latha: In that case, what happens to bank marginal cost of funds based lending rate (MCLR)? You think there will be a downward pressure on MCLRs or it is just that they will not be able to rise?

Gambhir: I do not think the MCLR really tracked the government bond yields. The government bond yields actually rose pretty fast.

Latha: There will be competition from – corporate will go to the bond market, won’t they. So to that extent there will be a demand led pressure?

Gambhir: That is right, but I think the MCLR is a slightly slow moving variable. Banks will typically maybe watch for a month or two months as to where the bond yields settle before they start taking action on their MCLRs. Also the first month of the year typically the corporate activity is not very heavy, so, even if you cut your MCLRs, it is highly unlikely that you will see a lot of demand. So, my guess is that people will wait and watch for at least a month, month and a half before deciding whether to cut the MCLRs.

Latha: Do you think we are in for big trouble in the second half? What if all negatives congregate – that oil prices are above USD 70 per barrel, and you have both private sector and public sector borrowing in the second half. Just leave us with a word on how you look at the second half?

Gambhir: I am looking at second half a lot more positively than the first half barring the crude price shock, and that was the reason why the private dealership community gave the government a feedback to sort of reverse the frontloading part. Two or three factors, one is that we are looking at inflation settling down closer to 4.5 percent as the first half goes out.

Second, there is an expectation that as the liquidity in the system turns towards deficit, RBI may be required to intervene in the bond market through their open market operations to supply liquidity. We are expecting about Rs 50,000-60,000 crore of RBIs open market operation (OMOs) in the second half to supply liquidity.

Thirdly, the overall sentiment would have settled down by then and the market would have known what kind of rate hikes we are expecting. So, all-in-all, the second half is likely to be a better time period for the government to borrow more.

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Bond market regulations likely to pull up markets in near future: India Ratings

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A downward trend in the primary corporate bond market could be because of the sharp rise in bond yields and tepid demand for non-working capital financing, an Indian Ratings and Research report said.

The report says the bond market will be majorly guided by the regulatory push to reinvigorate the bond market.

In Budget 2018, Finance Minister Arun Jaitley announced two regulations in the bond market. One was the 25% borrowing by the large borrowers through the bond market and the other was pension funds and insurance companies being allowed to invest in “A-rated” bonds which will further bring developments in the bond market.

The Securities and Exchange Board of India (Sebi) Chief Ajay Tyagi said they will announce further regulations in the bond market by September, according to The Business Standard.

In a relief to the current downtrend in issuances, the report says that the short-term money market (both commercial paper (CP) and certificate of deposit) have risen. This, it points, was possible because the short-term money market was backed by a surge in working capital demand.

On CP Issuances, the report says that it is likely to remain stable as it is driven by the disruption in the working capital cycle after the Goods and Services Tax rollout which will soon be resolved, the rapid increase in economic activities, rise in input cost prices and seasonal demand.

The report points that mutual fund debt assets under management (AUM) will play a major role in pulling up the corporate bond curve as a large build-up in debt mutual fund AUM has been a major driver for non-government bond curves so far.

The report reasons that in addition to the drying up of the banking sector’s liquidity, a sharp rise in the interest rate will cause stickiness of the funds and hence, the mutual fund AUM will be key in determining non-government bonds’ yields curves.

On non-public sector undertaking corporates, the reports said that they will remain stable as relatively lesser issuances by them will alleviate pressure on their bond yield curve.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow