The issuance of a new 30-year government bond (G-Sec) by the Reserve Bank of India on Friday will fix structural issues for Indian issuers, especially those undertaking infrastructure projects and needing long-term funding, according to India Ratings and Research (Ind-Ra).

The government will be raising ₹3,000 crore through the auction of a new 30-year G-Sec on Friday. Besides, it will also auction three G-Secs of eight, 10 and 18 years maturity to raise ₹12,000 crore.

As has been the global experience, a long-tenor government security facilitates setting a benchmark for other issuers, such as banks, financial institutions and corporates to access long-term funding through capital markets.

Pointing out that issuance of 30-year G-Sec is a step in the right direction for the development of the corporate bond market in India, Ind-Ra said lack of a benchmark has often been sighted as a shortcoming, which prevents Indian institutions from raising the much-required long-term funding from capital markets.

“Infrastructure companies are typically unable to raise more than nine-10 year funds, while their projects generally need 20-25 years of funding. Banks have significant loans in the 20-year plus category without sufficient similar tenored liabilities to balance it,” the credit rating agency said.

The start of the longer dated bond issuances will bring maturity in the market and will push the market towards the longer end of the yield curve.

“One may not rule out capital market issuances by top rated Indian corporates and infrastructure projects/companies. However, this is unlikely to happen in the initial phase of development of a long-dated fixed income market,” said Ind-Ra.

Positive effect The agency observed that the benefit (of long-term bond issuances) will be a trickle-down positive for government agencies such as Employees’ Provident Fund Organisation, pension funds, provident funds, and life insurance companies, among others, as investors.

These investors run maturity mismatches on the asset side which can be met from these issuances.

On the other hand, issuers such as public financial institutions, banks, public sector units, refinancing agencies, such as India Infrastructure Finance Company, National Housing Bank and Power Finance Corporation can use this as a benchmark to price longer dated debt in the 15- to 30-year bucket. This can then be used to lend at a fixed rate to infrastructure projects.

Ind-Ra said corporates and infrastructure companies will be able to manage their liabilities better once longer tenured debt is made available. Financial ratios, such as debt service coverage and interest coverage, will look better for these companies too.

The agency believes that foreign institutional investors, such as pension funds, provident funds and insurance funds, globally could be large investors since the yield is highly attractive compared with home countries in Europe and North America. However, this opportunity will remain limited due to a cap on their investment in the debt market.

It suggested that the RBI consider an interest rate reset clause at the end of 15 years to address interest-rate risk. The reset can be based on 364-day T-bill plus spread basis.

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