Interest rates

Rising interest rates to curb bond issuance this fiscal year: Icra Ratings report

Corporate bond issuance for this fiscal year is expected to remain subdued, with 4-5% growth to be seen 41.42 lakh crore on rising coupon rates, despite the drawdown more than doubling in the second quarter, according to a report.

Obligations September quarter sales doubled to reach 2.1 lakh crore in the first quarter, when it was at a multi-year quarterly low of 1 million crores. This was due to banks issuing bonds at a record high of 53,900 crore, and NBFCtraditionally the largest players in the market, issuing securities worth 1.1 lakh crore in the second quarter, according to an analysis by Icra Ratings.

Non-bank lenders remained the largest bond issuers with a 47% share in the first half, followed by corporates and banks at 33 and 20%, respectively, compared to 50, 40 and 10%, respectively, compared to at S1FY22. , according to the report.

The total bond issue amounted to 3.3 lakh crore in the first half and the agency expects Sales of 3.7 to 4.2 lakh crore in H2 FY23, slightly higher than a year ago, bringing the volume of outstanding bonds to 41-42 lakh crore by March 2023.

This translates into moderate growth over the year of only 4 to 5%, net of redemptions, with an increase in additional issues of 7-7.5 lakh crore, cons 6.8 lakh crore in FY22.

The agency attributes the weak volume growth to rising interest rates, which will force issuers to offer higher coupon rates/higher yields, which could increase investor appetite.

ICRA Ratings expects 10-year G-Sec (government securities) yields to harden to 7.7% in the near term and hold between 7.3 and 7.7% in the long term, leading to also an increase in yields of corporate bonds.

Even though domestic bond issuance more than doubled in the second quarter, external commercial borrowing (ECB) remained subdued due to rising overseas funding costs.

In the first five months of FY23, ECB approvals sought from the Reserve Bank fell 24% to $8.3 billion. Given the larger increase in policy rates by central banks and the resulting higher costs of borrowing abroad, overall borrowing costs for domestic firms have been higher than domestic financing costs and should remain so in the short term.

This is expected to keep approvals low in FY23 at USD 30-35 billion, compared to YSD 38.6 billion in FY22 and USD 35.1 billion in FY21 , according to the agency.

While the RBI’s policy tightening is likely to continue, the magnitude of the incremental hikes could be less than that seen since May 2022.

Icra foresees gradual increases in key rates until December 2022, with an increase of 25 to 35 basis points followed by a pause. In addition, with a large government borrowing program and a gradual 25-35 basis point rate hike, 10-year G-Sec rates are expected to tighten to 7.7% in the near term and remain between 7.3 % and 7.7% in the long term.

The agency projects net outflows from the Foreign Portfolio Investor (FPI) segment of $8 billion to $13 billion in FY23, compared to an outflow of $16 billion in FY22. But that could fall if the US Fed indicates lower than previously quoted rate hikes in the future.

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