NBFC and banks are going to issue bonds worth ₹30,000 crores. Why companies and banks are turning to bonds for collecting their funds?
Banks and non-banking financial companies (NBFCs) are expected to issue bonds totaling more than 30,000 crores to raise money at cheaper interest rates before the possible rate hike. NBFCs will issue most of the bonds, most of which will have maturities of five years or more.
HDFC will float a new tier 1 bond worth 3,000 crores, HDFC Bank will float 10-year non-convertible debentures (NCD) worth 10,000 crores, and Small Industries Development Bank of India is estimated to float 42-month notes worth 4,000 crores.
Due to concerns over the future of borrowing costs caused by rising interest rates and soaring global inflation, Indian banks are expected to enter the bond market.
According to Anand Dama, an analyst at financial services research firm Emkay Global, banks may hurry to raise capital for their mortgage books and long-term infrastructure projects before interest rates increase.
SBI, HDFC Bank, and Bank of Maharashtra are three banks that are estimated to enter the market this week with AT1 bonds totaling more than 10,000 crores.
The AT1 bond market has already been accessed by the Bank of Baroda, Punjab National Bank, and Canara Bank. According to ICRA Ltd., public sector banks are estimated to raise $20,100 crore through AT1 bonds in the current fiscal year (FY23) to meet expansion requirements.
Corporate bonds worth $1.45 trillion have been raised since June, according to Primedatabase. It has increased by 15% from last year.
Despite this, the growth of industrial credit increased to 10.5% in July from 0.4% in July 2021. Large industrial credit increased by 5.2% after declining by 3.8% the year before.
In July, the rate of credit growth decreased from 13.7% in June to 15.1%. Loan growth was primarily driven by the services and industrial sectors, than by agriculture and retail trade.
Why NBFCs and banks are turning to bonds for collecting their funds?
Top-rated businesses are increasingly turning to the bond market instead of banks for their borrowing needs because those offer more flexible terms and cheaper interest rates.
These rates are one of the main reasons companies and banks turned to the bond market and collected funds for their organization without losing any equity.
Bonds can provide more stable and predictable returns when held to maturity because they are often less volatile and hazardous than equities. Bond interest rates frequently exceed those of bank savings accounts, certificates of deposit, and money market accounts.
According to CLSA, the only markets where bonds have surpassed stocks in attractiveness are the US and India. The firm said that because equities have traditionally produced “negative returns,” it is telling investors to exercise care.
Vikash Kumar Jain stated, “We see a clear descriptive trend of declining stock returns for investments made at every rise in the market. Assets made over a specific level of this valuation gap end up delivering negative or very poor returns for each market; above this level, bonds become more appealing investments than equities.”
Through a bond auction, India raised 330 billion rupees ($4.14 billion), including 130 billion rupees of the 7.26% 2032 note, which is estimated to soon replace the current benchmark paper. Seven-year bonds were, only partially devolved to dealers by the Reserve Bank of India, indicating a lackluster market for the time.
Going long on the benchmark 10-year bond is advised by Morgan Stanley because it believes there is a “good possibility” that JPMorgan would include Indian government bonds in its index.
In a letter, strategists Min Dai and Madan Reddy stated, “We currently estimate that there is a very good likelihood that JPM would announce the index inclusion of India’s bond market in mid-September. We advise taking tactical positions for a strong INR and lower G-Sec rates. To move the price 25 bps lower from here, we like to add a short EUR/INR limit order and long 10-year G-Secs.”
Actual inflows may not be found until June or September 2023, according to the international brokerage. India’s benchmark 10-year bond was 7.23%, while the value of the rupee against the dollar was 79.80.
Morgan Stanley estimated the rupee will outperform other low-yielding currencies and that the 10-year bond rate would decline by 25 basis points.
The paper stated, “We project that the FAR (Fully Accessible Route) list bonds would expand by $10 billion every month over the next 12 months.
Accordingly, $360 billion in eligible bonds would be issued in 2H23, making it the index’s second-largest bond market behind China. Foreign investment is not limited when buying bonds through FAR.
Morgan Stanley projects that the bond market will bring in $18.5 billion annually over the medium term, increasing foreign ownership to 9% by the end of 2032.
Top-rated private and state-owned businesses in India may be able to borrow money at historically low rates, but the situation hasn’t changed much for lower-rated businesses in the banking industry. However, intermittent bond difficulties have started.
edited and proofread by nikita sharma
