Primary market issuances of corporate bonds jumped to ₹3.9-lakh crore during H2 (second half) of FY23 (up to February 2023) from ₹2.5-lakh crore during the corresponding period of 2021–22, according to the Reserve Bank of India.

This offset the moderation in overseas bond issuances from ₹50,000 crore in H2FY22 to ₹10,000 crore in H2FY23, per the RBI’s monetary policy report (MPR).

Bond market experts opine that the upsurge in financial market volatility and tightening global financial conditions led to moderation in overseas bond issuances, prompting India Inc. to tap domestic bond markets in a big way.

Banks tapped the bond market to raise capital, aggregating ₹75,555 crore during H2FY23 (up to February 2023) against ₹57,548 crore during H1FY22, for their rapidly expanding balance sheets, driven by the surge in credit demand.

The report said nearly the entire resource mobilisation in the corporate bond market (98.7 per cent) was through private placement.

Ajay Manglunia, MD & Head, Investment Grade Group, JM Financial, said: “When the Fed Funds Rate (FFR) was at near zero level last year, Indian corporates could raise money overseas at an all-in cost of about 6.5 per cent (including spread and hedging cost). At that time, corporates had to pay more (7.50–8 per cent) in the domestic markets. So, borrowing overseas gave them a cost advantage.

“In the last year, the US Fed aggressively increased the FFR to the 4.50–4.75 per cent range, whereas the RBI increased the repo rate only by 250 basis points in the last 11 months. With the all-in cost for overseas borrowing rising to about 11 per cent now, the cost advantage no longer exists. So, corporates have turned to the domestic debt capital markets.”

Marzban Irani, CIO-Fixed Income, LIC Mutual Fund, said public sector undertakings, banks, and housing finance companies (including housing finance companies) were the main borrowers in the domestic corporate bond market in the second half of FY23.

Other modes of raising resources

To fund the robust credit demand, banks also shed excess holdings of statutory liquidity ratio (SLR) securities (government securities and State development loans) and tapped certificates of deposit (CDs).

The report noted that excess holdings of SLR securities by banks moderated to 8.5 per cent of deposits as of February 24, 2023, from 10.4 per cent at the end of March 2022 as banks funded credit demand by shedding excess investments.

Currently, banks have to maintain SLR equivalent to 18 per cent of their deposits.

RBI said banks continued to rely on CDs for funding, with issuances of ₹3.8-lakh crore in H2 (up to March 24, 2023) on top of ₹3-lakh crore in H1.

Robust growth

Bank credit growth remained robust in H2FY23, in tandem with economic activity, the report said. Growth in non-food bank credit accelerated to 15.4 per cent (y-o-y) as of March 2023, from 9.7 per cent a year earlier.

The MPR underscored that with credit growth outpacing growth in aggregate deposits, the incremental credit deposit ratio was above 100 per cent, raising questions about the long-term sustainability of high credit growth

Corporate bond issuances  

The quantum of primary market issuances of corporate bonds during H1FY23, at ₹2.8 lakh crore, was the same as the year-ago period.

The amount raised by banks via private placement of debt aggregated ₹30,134 crore during H1FY23, compared to ₹15,627 crore during H1FY22.

There were no overseas issuances of corporate bonds in H1FY23. in sharp contrast, these issuances aggregated to ₹60,000 crore in H1FY22.

Corporate bond yields

Corporate bond yields and spreads moved higher during H2FY23, in sync with government security yields, the report said.

The average yield on AAA-rated 3-year bonds issued by non-banking financial companies (NBFCs) and corporates increased by 57 basis points/bps (to 8.12 per cent from 7.55) and by 49 bps (to 8.07 per cent from 7.58 per cent), respectively, in March 2023 over September 2022.

The MPR said the average yield on issuances by public sector undertakings (PSUs), financial institutions (FIs), and banks rose by 46 bps to 7.75 per cent.

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