The rise in interest rates is hurting India Inc more than the government with the gap between yields on corporate paper and government securities fast widening.
In other words, the cost of loans for India Inc is on the rise, while there has not been any upward pressure on interest rates on government bonds.
A sudden tightness in the financial system's liquidity has caused the corporate paper yield to harden.
The annualised yield on a 10-year government paper is now veering around 7.2 per cent. The annualised yield on a corporate paper of similar maturity is around 7.70 per cent, taking the spread or the yield differential to about 50 basis points. Over the last two months, the spread has doubled.
The spread between government bonds and corporate paper in the five-year segment, too, has doubled over the last two months - from about 35 basis points to 70 basis points.
The annualised yield on the five-year government bond is now 6.70 per cent against 7.40 per cent for a corporate paper with an identical maturity period.
The spread has risen the maximum in the one-year segment. Here, it has trebled - from about 30 basis points at October end to 90 basis points now.
The yield on the 364-day Treasury Bill is now about 6.20 per cent, while a one-year commercial paper and a certificate of deposit fetch 7.10 per cent.
"If one takes a close look at the spread, one will see an inverted yield curve. The spread is the widest (90 basis points) at the short-term and the thinnest (50 basis points) in the long-term. With no signs of slackness in the credit offtake, corporate loans are expected to turn more expensive," said a treasury manager.
The bond yields, however, may continue to be range-bound in the absence of any interest rate signal coming from the banking regulator.
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