Brief: The corporate bond issuances by Indian companies have recorded robust growth of 43% in FY17 and reached Rs.3.6 lakh core; Yield on 10 year AAA rated corporate bonds has dropped by 150 bps to 7.6% by end of Q1, FY18.

Impact: Positive

The corporate bond issuances by Indian companies have recorded robust growth of 43% in FY17 and reached Rs.3.6 lakh core. However, as on first quarter, FY18, the issuances are marginally lower, recording a growth of over 24.3%. Credit offtake, on the other hand, has been languishing since FY15 and in recent quarters, offtake has been contracting by (-) 3.2%. This indicates that bond market is an attractive destination in India considering the fact that money has been continuously raised by corporates, operating in sectors, which are otherwise showing a decline in offtake.

Yield on 10 year corporate bond for AAA rated corporates has dropped by 150 bps to 7.6% by end of Q1, FY18. In comparison to Government’s 10 year G-Secs, yields of AAA rated corporate bonds have been higher no more than 70-80 bps. The Weighted average base rate of the Indian commercial banks, in contrast, has dropped by only 65 bps during in last five years. In last two years, the RBI has cut repo rate by 175 bps, but the commercial banks have not been consistent in transferring the benefits to the end consumers. Commercial banks, on their part have been reeling under bad debt scenarios and the resultant NPA crises and have therefore played a role in the so called Twin Balance Sheet (TBS) problem as pointed out by the Chief Economic Advisor, Arvind Subramanian. Given the current circumstance, we therefore believe that bond issuances will further rise in the near term as corporates will find the route cheaper as well as simpler. Also, the trend will be more visible as the depth of the capital markets increases over time. Given the high entry barriers however, only better rated companies can access this market; corporates willing to enter the market will have to therefore strengthen their financials and businesses in order to stand in good stead.

Growth (%age) in Bond Issuances & Offtake

Yields (%)

Source: CMIE; SMERA Knowledge Centre

Note: WABR= Weighted Average Base Rate