Corporate issuance of bond funds in India projected to hit record levels as companies aggressively pursue affordable financing options
In August 2021, the corporate bond market in India experienced a significant surge, marking a shift in corporate financing strategies. This trend was primarily driven by falling interest rates, surplus liquidity, and regulatory reforms that improved market transparency and access.
Key issuers in this period included Non-Banking Financial Companies (NBFCs), housing finance firms, and large corporates, who focused on short-to-medium term bonds. The surge in issuance was influenced by several factors. Monetary easing by the Reserve Bank of India (RBI) lowered borrowing costs, encouraging companies to raise funds through bonds rather than bank credit. Strong investor demand, especially for AA/AA+ rated papers, was also a significant factor, as short-term government securities supply remained constrained.
SEBI reforms played a crucial role in the increased issuance. These reforms reduced minimum ticket sizes and enhanced transparency, attracting a broader range of investors, including a gradual rise in retail participation. Corporates, including NBFCs and housing finance companies, increasingly preferred bonds to diversify funding sources and lock in lower rates.
Public sector undertakings and large private corporates also joined the bandwagon, issuing bonds to capitalize on favourable market conditions. The corporate bond market's growth provided an alternative financing avenue, easing pressure on banks and potentially reducing incremental bank loan growth. Some corporates preferred bonds over bank loans to benefit from lower-interest costs and longer maturities.
Banks remained significant lenders, but the bond market's expansion contributed to a more diversified corporate debt ecosystem, increasing overall funding stability. In the April-June quarter, the incremental share of bank credit in overall resource mobilization fell to 22%, down from 44.6% in FY24 (State Bank of India).
Anurag Mittal, head of fixed income at UTI Asset Management, stated that there is ample demand from mutual funds for the up-to-five-year space in the bond market. This trend of favourable rate conditions in the corporate bond market over traditional bank loans is expected to persist. Investors are chasing supply in the bond market due to ample liquidity.
The bond market's appeal to mutual funds is not limited to the up-to-five-year space and may extend to higher-rated papers. Firms raised 4.07 trillion rupees via bonds in April-July, the highest ever for the first four months of a financial year. According to Vinay Pai, head of fixed income at investment banking firm Equirus Capital, rate transmission in the bond market is faster than in traditional bank lending.
Indian firms are expected to raise at least 300 billion rupees ($3.43 billion) via bonds over the next three weeks. Yields on corporate bonds have dropped sharply following the RBI's 100-basis-point rate cut between February and June. Pranav Haldea, managing director at Prime Database Group, stated that they roughly have an average supply of 1 trillion rupees per month and expect this trend to sustain, with fundraising rising to another record this year.
The trend of mutual funds favouring the bond market over traditional bank loans may persist. Some mutual funds may also start looking at AA+ and AA-rated papers to play for spread compression, according to Anurag Mittal. The trend of higher-rated companies and banks rushing to tap the corporate bond market for cheaper fundraising is a broader shift in corporate financing strategies.
Declining bond yields and ample liquidity are underscoring this broader shift in corporate financing strategies. Large liquidity infusions have made bond markets more attractive than bank lending. The corporate bond market's growing appeal is highlighted by the record fundraising in the first four months of the financial year.
Several companies are expected to tap the corporate bond market this month, including Manipal Hospitals, State Bank of India, IRB Infrastructure Trust, Delhi International Airport, Torrent Investments, Power Grid Corp, and GMR Airports. Dovish central bank actions have ensured ample liquidity in the bond market. Mutual funds are expected to continue to have demand in the bond market due to the lower-for-longer scenario.
- Trader's capital is being invested in corporate bonds due to the favourable market conditions and lower borrowing costs, as monetary easing by the Reserve Bank of India (RBI) has encouraged companies to raise funds through bonds rather than bank credit.
- SEBI reforms, which reduced minimum ticket sizes and enhanced transparency, have attracted a broader range of investors, including retail participants, to the corporate bond market, creating more liquidity for traders.
- The corporate bond market's growth provides an alternative financing avenue for funds, reducing pressure on banks and potentially lowering incremental bank loan growth, making it appealing to creditors.
- Mutual funds have shown a significant demand for corporate bonds, particularly short-term government securities due to ample liquidity, anticipating a lower-for-longer scenario in the bond market, which is expected to continue.
