The overall domestic bond issuances in FY23 are expected to be in the ₹7-7.5 lakh crore range, recording a growth of 4-11 per cent over issuances of ₹6.8 lakh-crore in FY22, according to ICRA.

Domestic rupee-denominated bond issuances more than doubled sequentially to ₹2.1 lakh crore in Q2 FY23, up from a multi-year quarterly low of ₹1 lakh-crore in Q1 (April-June) FY23, driven by an all-time high issuance by banks of ₹53,900 crore, while NBFC issuances also remained strong at ₹1.1 lakh-crore, the credit rating agency said.

The overall bond issuances was at ₹3.3 lakh crore in H1 (April-September) FY23. Bond issuances of ₹3.7–4.2 lakh-crore are expected in H2 (October-March) FY2023, per ICRA’s assessment.

Domestic bond issuances more than doubled in Q2 (July-September) FY23 even as External commercial borrowings (ECBs) remain subdued due to rising funding costs overseas, the agency said.

Net of scheduled redemptions, the volume of bonds outstanding will rise to ₹41–42 lakh-crore by March 31, 2023, representing a modest year-on-year (y-o-y) growth of 4–5 per cent, it added.

During the first five months (5M) of FY23, external commercial borrowings approvals sought by Indian corporates from Reserve Bank of India (RBI) fell by 24 per cent on y-o-y basis to $8.3 billion.

Given the larger increase in policy rates by central banks in developed economies and consequent rise in overseas borrowing costs, the all-in borrowing costs for Indian corporations have been higher than domestic funding costs and are likely to remain so in near term, the agency said.

This is projected to keep approvals low in FY23, at $30-35 billion, compared to $38.6 billion in FY22 and $35.1 billion in FY21.

Even though policy tightening by RBI is likely to continue, the magnitude of incremental hikes may be less than hikes since May 2022, opined the agency.

Rate hike

ICRA anticipates incremental policy rate hikes in policy meetings until December 2022, with an increase of 25–35 basis points (bps) followed by a hiatus. Furthermore, with a big government borrowing programme and an incremental rate hike of 25–35 bps , 10-year G-Sec rates are projected to harden to 7.7 per cent in the short term and remain between 7.3 per cent and 7.7 per cent in the long term.

FII and FDI

ICRA anticipates net outflows from the foreign institutional investor (FII) segment of $8–13 billion in FY2023, down from outflow of $16.0 billion in FY22.

If prospects for additional monetary tightening by the US Fed soften, projected FII inflows into the stock segment may resurface in Q4 FY23, it added.

Foreign direct investment (FDI) inflows in FY23 will be largely in line with the previous year of $55-60 billion, despite the fact that flows in 5M FY23 will trail the previous year’s level by 11 per cent, per the agency’s analysis.

ICRA said FDI outflows in 5M FY23 are underperforming, compared to the corresponding period last year, despite strong growth in remittances abroad under the Liberalised Remittance Scheme (LRS).

The agency forecast consumer price index (CPI) inflation to decline to 6.7 per cent in October 2022, owing to a high base, while remaining above the MPC’s upper limit of 6 per cent.

The agency anticipates another rate hike in the December 2022, the magnitude of which will be determined by the upcoming CPI and GDP figures.

Deposit and Credit growth

ICRA observed that deposit growth in the banking system remains subdued. Overall incremental deposit growth is expected to be ₹14.0–15.0 lakh-crore in FY23, corresponding to 8.5–9.1 per cent y-o-y growth in total deposits to ₹178.7-179.7 lakh-crore by March 2023.

In Q2 FY23, incremental credit growth slowed relative to Q1 FY23, even as the gap with deposit growth widened.

Nonetheless, ICRA anticipates bank credit growth of 12.7–13.5 per cent in FY23, with an incremental bank credit of ₹15.0–16.0 lakh-crore and overall bank credit at ₹133.4-134.4 lakh-crore by March 2023.

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