There will be tailwinds for the corporate bond market in FY24, with the interest rate environment relatively stabilising in its favour, according to Gurpreet Chhatwal, Managing Director, CRISIL Ratings.

This observation comes even as banks are increasing their benchmark lending rate — the marginal cost of funds-based lending rate (MCLR) — to which corporate loans are linked, in response to the cumulative 250 basis points hike in the repo rate between May 2022 and March 2023.

Chhatwal observed that in a rising interest rate scenario, the market typically shifts towards bank borrowings because they are relatively cheaper and the bond markets factor in the rate hikes much faster than banks.

Conversely, when interest rates start falling or remain stable, bond markets typically tend to offer a more competitive position vis-a-vis bank loans in high rating segments.

“So, we are now in a situation (where) the interest rates have stabilised with the RBI deciding not to increase interest rates,” Chhatwal told analysts.

Also read: Bond yields little changed before RBI policy decision

He opined that, at this juncture, the bond as well as bank loan markets are evenly poised.

At their last meeting from April 3-6, all six members of the monetary policy committee voted to keep the repo rate unchanged at 6.50 per cent to assess the progress made so far in the transmission of the cumulative 250 basis points rate hike between May 2022 and March 2023.

“So, we are seeing people who want to raise money are now preferring bonds and not going to the alternate, which is bank loans.

“And also, as we see rest of the yearr, at some point in time, we’ll start seeing interest rates going down. I think that usually is much beneficial for the bond market,” Chhatwal said.

While the policy repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches) has risen by 250 basis points (bps) from May 2022 to March 2023, the one-year median MCLR of banks increased only by 140 bps during the same period.

In sharp contrast, the external benchmark lending rate (to which retail and micro, small and medium enterprise loans are linked) has seen full transmission of the 250 bps hike in the repo rate.

India Ratings and Research (Ind-Ra) opined that the transmission of monetary policy in the banking system could intensify in FY24, driven by the sharp rise in banks’ MCLR by 100-150 bps year-on-year. 

According to the Reserve Bank of India’s latest monthly bulletin, the announcement of the Corporate Debt Market Development Fund (CDMDF) as a backstop facility for the purchase of investment-grade corporate debt securities during times of stress instilled confidence in the corporate bond market.

The primary market issuances of corporate bonds increased to ₹3.9 lakh crore during the second half of FY23 (up to February 2023) from ₹2.5 lakh crore during the corresponding period of FY22, as per RBI’s latest monetary policy report.

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