Lower borrowing costs have led to record primary issuance of corporate bonds of ₹2.09-lakh crore in the first quarter of (April-June) 2020-21, according to Reserve Bank of India Governor Shaktikanta Das.

In this regard, the Governor emphasised that borrowing costs in financial markets have dropped to their lowest in a decade on the back of abundant liquidity.

Interest rates on instruments like the 3-month Treasury Bill, commercial paper (CP) and certificates of deposit have fully priced in the reduction in the policy rate and are, in fact, trading below it in the secondary market, he added.

CPs of non-banking finance companies (NBFCs) have softened to 3.80 per cent on July 31, 2020. Rates have fallen to 3.40 per cent on July 31, 2020 for non-NBFC borrowers.

Transmission effect

Das noted that transmission of the rate cuts by the monetary policy committee (MPC) would not have been possible to the extent achieved so far without creating comfortable liquidity conditions.

Referring to the monetary and liquidity measures so far taken by the RBI to mitigate the negative fallout of Covid-19, Das said the spreads of 3-year ‘AAA’ rated corporate bonds over similar tenor government securities (G-Secs) have declined from 276 basis points (bps) on March 26, 2020 to 50 bps on July 31, 2020. One basis point is equal to one-hundredth of a percentage point.

Spreads on ‘AA+’ rated bonds softened from 307 bps to 104 bps; spreads on AA bonds narrowed from 344 bps to 142 bps over the same period.

Even for the lowest investment grade bonds (BBB-), spreads have come down by 125 basis points as on July 31, 2020.

NBFCs: Financing conditions stabilise

In particular, market financing conditions for NBFCs, which had become challenging, have largely stabilised in the wake of targeted policy measures, Das said.

The Governor observed that for ‘AA+’ rated 3-year NBFC bonds, spreads over similar tenor G-Secs have narrowed from 360 basis points (bps) on March 26 to 139 bps on July 31, 2020.

Although non-food bank credit has slowed to 5.6 per cent (As on July 17), Das underscored that credit to NBFCs has grown at 25.7 per cent in June, loans to services at 10.7 per cent, and to housing at 12.5 per cent.

“Monetary transmission has also improved considerably. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 162 basis points during February 2019-June 2020, of which 91 basis points transmission was witnessed during March-June 2020,” explained the Governor.

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