Bond issues to increase in FY25, lending rates to ease only from H2: India Ratings

The Indian economy is in the middle of coordinated tightening on the fiscal, monetary, liquidity and regulatory fronts--the aggregate impact of which will be felt in FY25. While fiscal and regulatory tightening will continue, monetary conditions starting with the banking system liquidity to begin to ease from H2 FY25, according to India Ratings.

“Easing of monetary conditions will be visible in the short-term rates whereas long term yields in the banking system and bond markets would remain broadly at an elevated level. Given the expectation of limited supply of bonds and higher demand from investors, we expect bond issuances to increase in FY25 compared to FY24,” said Soumyajit Niyogi, Director, Core Analytical Group.

While deposit rates have peaked, the structural shift in the system will keep “downward rigidity intact” due to which lending rates are expected to remain elevated in FY25, barring modest softening towards the end. 

Further, regulatory tightening and pricing dynamics in the capital market suggest the prevailing rates will continue and any decline in risk-free rates will be off-set by an increase in credit premium by widening of the credit spread and term structure.

”In the backdrop of limited supply and healthy demand, AAA and AA+ issuances are expected to demonstrate highly competitive pricing. Moreover, risk appetite may percolate down to the lower end of the credit curve as well,” the rating agency said, adding that overall credit market sentiment is expected to be cautious.

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Easing liquidity

Even so, rates on commercial papers (CP) and certificates of deposit (CD) rates are expected to ease in-line with easing liquidity conditions and a constructive view on monetary policy. 

”Easing liquidity is expected to reduce incremental CD issuances, thus favouring the overall CP / CD market. In the case of long-term yield, Ind-Ra does not expect the current low spread to continue. Moreover, the low yield will make it less attractive for the regular investors such as insurance, EPFO and NPS,” it said.

However, the credit market will also be supported by strong balance sheets of corporates and banks, favourable domestic business cycle compared to the US and Europe, and growing global prominence.

Moderation in growth of NBFCs, owing to their own disciplinary approach on balance sheet expansion and regulatory interventions, is expected to bring ‘more semblance’ in banks’ aggregate credit growth in the banking sector. 

• Also read: Budget 2024: Indian Bonds rally as government lowers borrowings

In turn, NBFCs’ are seen resorting more for retail issuances of debentures to lend granularity to funding and diversify the investor base. NBFCs have also started to grow their franchisee in an asset-light manner through co-lending and business correspondent arrangements, which is expected to help optimise capital utilisation.

“NBFCs would mobilise CPs in a higher proportion, depending on the tenure of asset segments. They would also focus more on off-book tie-ups to increase franchisee, CP mobilisation to keep ALM sanctity, securitisation and an evenly balanced funding mobilisation from banks and capital markets in FY25,” the agency said.

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