Fundraising through private placement of corporate bonds slumped by around 71 per cent in September quarter compared to the June quarter despite an increase in the number of issuance, primarily due to market sentiment taking a hit from rising inflation and a hawkish US Federal Reserve.
Companies and financial institutions raised Rs 1.62 trillion through 831 bond issuance in September quarter, compared with Rs 2.79 trillion through 647 offerings in first quarter of the current financial year, according to data compiled by Outlook Business.
“There was a lot of investor appetite in the first quarter after RBI did the pause. While people were thinking of rate cuts happening after 6 months or so, that sentiment did not carry to the September quarter when inflation reached to a record high,” said Ajay Manglunia, Managing Director and Head of Investment Grade Group at JM Financial.
The Reserve Bank of India in April kept the benchmark interest rate or the repo rate unchanged for the first time at 6.5 per cent after hiking it by 250 basis-points between May 2022 and February 2023. The pause at that time was somewhere an unexpected move from the central bank; therefore, it led to an increase in both supply from the issuer side and investor appetite.
Further the momentum on the monetary policy front was sustained when the RBI kept the interest rate unchanged for the second consecutive time in June.
On top of this, what else drove companies to the market towards the end of the first quarter was a slightly lower than expected CPI print for May. India’s retail inflation moderated to a 25-month low of 4.25 per cent during the month, mainly due to the statistical effect of a high base. Retail inflation for the quarter averaged within RBI’s tolerance band of 4-6 per cent at 4.59 per cent.
Considering these factors, market was of view that RBI could start cutting interest rates in the current year. The expectation increased the borrowing by state owned companies such as Small Industries Development Bank of India, Power Finance Corp and REC.
However, the scenario changed when India’s annual retail inflation rose to a 15-month high of 7.44 per cent in July on back of a surge in vegetable prices, before moderating to 6.83 per cent in August. This pushed back the expectation of rate cuts by the RBI among market participants in the domestic debt markets.
According to economists, retail inflation in September quarter is set to average around 6.6 per cent, more than RBI’s current estimate of 6.4 per cent.
Meanwhile, tracking global market sentiment, yields on bonds issued by National Bank for Agriculture and Rural Development, considered the benchmark in the corporate bond market, rose by around 15 basis-points across tenures during the September quarter. Consequently, most issuers refrained themselves from large borrowings as it increased their cost.
On the global front, US Federal Open Market Committee towards the end of July raised the federal funds target rate by 25 basis-points to 5.25-5.50 per cent with signalling further rate hikes. This led to a rise in US Treasury yields which put the domestic yields under pressure throughout the remaining part of the quarter.
The exit of Housing Development Finance Corp from the market also contributed to the sequential fall in amount borrowed through privately placed bonds in September quarter.
“HDFC was a huge issuer in the first quarter. Its absence from the market also led to a sharp fall in the fundraising during the second quarter,” said Soumyajit Niyogi, Director of Core Analytical Group at India Ratings and Research.
Before merging into HDFC Bank on July 1, HDFC was on a borrowing spree with large offerings that would further extend the gap between the borrowing figures of the quarters. Such was its dominance that it alone accounted for 25 per cent of the total fundraising during the month of May. In the end, total funds raised by HDFC in the quarter aggregated around Rs 460 billion.
Also, while when HDFC was about to take leave, the first quarter saw two huge maiden issues that were by Goswami Infratech Pvt Ltd, a Shapoorji Pallonji Group company, and National Bank for Financing Infrastructure and Development. Goswami Infratech, rated “BBB-”, raised Rs 143 billion through bonds maturing on April 30, 2026 at 18.75 per cent, whereas NaBFID, with a “AAA” rating, borrowed Rs 100 billion through 10-year papers at 7.43 per cent.