RBI's liquidity-tightening steps halt companies' bond issuances

Commercial papers, certificates of deposit also dry up

The Reserve Bank of India’s (RBI’s) move to tighten liquidity has hit corporate bond issuances, as companies have postponed their fund-raising plans following hardening of interest rates. As a result, there has not been any issuance of corporate bond since the central bank announced its measures on Monday.

On Tuesday, yields on AAA-rated papers of public-sector undertakings shot up 60-120 basis points in the secondary market for 10 year- and five-year paper and breached the nine per cent mark. Though yields have come down since, those have stayed significantly high, above nine per cent. The tightening of liquidity also led to a drop in corporate bond volumes in the secondary market.

“There have been no issuances in corporate bonds since Tuesday and trading volumes have dropped. Investors are liquidating their positions and holding on to cash. Earlier, trading volumes in corporate bonds used to be Rs 5,000-7,000 crore (Rs 50-70 billion) on a daily basis. That has dropped to Rs 1,500-2,000 crore (Rs 15-20 billion) after Monday,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

On Monday, RBI had capped banks’ daily borrowing from the liquidity adjustment facility at Rs 75,000 crore (Rs 750 billion) and increased the marginal standing facility rate by 200 bps. It also announced open-market sale of government securities to suck out liquidity. The move was aimed at making money dearer and curb speculators in the foreign exchange market. The rupee has depreciated close to 10 per cent against the dollar since April.

Since Monday, issuance of certificates of deposit, too, have been almost nil. According to issue arrangers, the companies that were planning to raise funds by way of bonds have postponed their issuances in a situation where yields are rising.

The insurance sector, a key buyer of these bonds, said it expected a reversal of RBI’s measures in the next couple of months. Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance, said the currency would stabilise in the next two-three months, allowing the central bank to roll back the measures.

Commercial paper (CP) issuances also dried up last week. According to issue arrangers, Reliance Capital and Tata Capital tapped the market with CP issuances in the tenure of about three months at high rates of 10 per cent and above.

“Those really desperate for funds and ready to pay higher rates will tap the market. But most companies will take a wait-and-watch stand, at least till July 30, when RBI will review its monetary policy,” said an issue arranger. Insurers said they were staying away from corporate bonds in the absence of good papers and rate-cut hopes.

In its May policy, RBI had cut the repo rate by 25 basis points to 7.25 per cent, but had maintained there was little room for further easing. Most economists are expecting a status quo on key policy rates in the first-quarter review of the monetary policy on 30 July.