MUMBAI: Rising bond yields may make bond market fund raising unattractive especially at a time when the government is pushing the bond route for infrastructure and corporate investments. Such elevated rate gauge will only prompt Indian companies to dump the debt market as the lure of bank loans increases amid expanding economic activities.

“Cost of rupee funds has definitely gone up for Indian companies both in bond and loan markets,” said Ananth Narayan, a professor of finance at SP Jain Institute of Management and Research in Mumbai. “On a relative basis, given the sharp rise in bond yields, loans have started to look more attractive.”

“While macro factors such as rising oil prices & inflation, and rising twin deficits justify higher yields, some of the recent yield rise is also on the back of reduced participant interest in Indian bond markets,” he said.

Bank loans grew 13 per cent year-on year as on May 25 this year, the fastest growth rate in recent months.

Debt market fund raising is already falling. In April and May this financial year, corporate bond sales (via private placement) fell 63 per cent to Rs 32,704 crore, show data from Edelweiss Finance.

“Rising yields would be able to upset the government’s wish to attract more companies into debt market as bank loans look cheaper now,” said Ajay Manglunia, executive vice-president at Edelweiss Financial Services. “Now bonds are a bit more expensive than bank loans.”

The spread between corporate bonds and Gsecs is likely to rise as investors may demand higher coupon from companies especially with state bonds offering higher yields than corporate bonds, dealers said. An AA-rated nonbanking finance company may raise 10-year money at 9.75 per cent, which is about 70-80 basis points higher than the level a year ago. For a AA-rated company in manufacturing sector, average 10-year bank loan may be priced at 60-80 over MCLR (marginal cost of fund based lending rate), a base matrix over which a spread is added to price a loan, said a treasury head from a mid-size bank. There are several other factors like nature of business, sectors, credit weightages that are used to determine the rate.

“In an increasing rate scenario where Gsec yields are going up, corporate cost also increases and capital markets become less attractive compared with sticky MCLR of banks,” said Madan Sabnavis, chief economist at Care Ratings. “These markets are good when rates come down as cost is elastic here.” “Again, some of these (companies) would have crossed the large exposure limits of banks of Rs 15,000 crore for this year and perforce have to pay more in the market,” he said.





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