Rate hikes fuel demand for corporate bonds

Rising Investor Appetite

- Since May, RBI raises repo rate by 140bps in 3 rounds to 5.4%

- Fund managers expect further rate hikes

- HDFC, Sidbi, LIC Housing Fin, Nabard & Bajaj Housing were top issuers

- Top-5 issuers in July raised over 55% of the total funds

Mumbai: Issuances of corporate bonds rose more than 16 per cent month-on-month in July to Rs 58,452 crore due to softening of yields on these instruments. Further rate hikes as guided by various central banks shall be data driven and more situational. That has kicked in demand for papers as investor appetite has improved.

According to the data from Prime database showed, banks and companies raised Rs58,452 crore in July, as against Rs 50,099 crore in June. Since the beginning of this calendar year, issuances remained highest in month of March, with companies raising Rs 81,580 crore.

Last week, the monetary policy committee of the central bank has hiked policy rate by 50 basis points to 5.40 per cent. This was the third consecutive rate hike by the central bank in this year after a 40 basis points hike in May and 50 basis points in June. With 50 basis points hike, the RBI has increased rate by 140 basis points since May this year.

"Post RBI policy, the market turned hawkish due to 50 basis point repo hike. With expectations of calibrated liquidity withdrawal from the system, banks will have to compulsory increase their lending rates sharply. Issuers may now turn to corporate bonds issuances," said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincorp, a Mumbai-based debt advisory firm.

Meanwhile, fund managers expect rates to rise further with a view of hawkish RBI policy.

"Expect rates to be in a band of 7.15-7.50 per cent for benchmark in coming quarter before it takes further clues for inflation and rate actions," Manglunia added.

Of the total amount raise in July, Housing Development Finance Corp (HDFC) raised highest amount of Rs 14,111 crore, followed by Small Industries Development Bank of India (SIDBI) who raised Rs 6,905 crore, LIC Housing Finance companies raised Rs 6,150 crore, National Bank for Agriculture and Rural Development (NABARD) raised Rs 3,000 crore and Bajaj Housing Finance raised Rs 2,050 crore, Prime database data showed.

The top five issuers in July raised more than 55 per cent of the total funds. "Issuances in corporate bonds have risen in recent time primarily after a long time rates have softened, in line with fall in the yields of G-Sec which after touching 7.65 per cent in June retraced back to 7.12 per cent before policy this month," said Ajay Manglunia, MD and Head Institutional Fixed Income at JM Financial.

The yields on these instruments have moderated in the last month by 10-18 basis points following fall in yields on government securities. The yields have eased after the crude oil prices in the international market softened and fear of inflation got lighter as commodity prices have also fallen.