MUMBAI: The cost of borrowing for Indian corporates in the bond market is set to ease as the central bank is expected to persist with measures to bring down yields after the Monetary Policy Committee (MPC) stressed on measures needed to flatten the rate curve.
The Reserve Bank of India (RBI) Friday cancelled an auction of a five-year paper series of Rs 11,000 crore, with bidders reportedly demanding about five-seven basis points more than what the central bank was willing to offer.
“Today’s auction cancellation of a short-duration paper is yet another indication that RBI is seriously pursuing yield management,” said Naveen Singh, head of trading at ICICI Securities PD. “There seems to be some shift in focus away from the ten-year segment to five-year segment as seen in the last few auctions and G-SAP as well.”
“This is the second time in a row RBI has intervened in the primary market to check yield rise in the five-year paper,” he said.
The central bank withdrew the auction of a government bond maturing in 2026 and bearing a coupon of 5.63 per cent.
The same paper yielded as much as 5.71 per cent Friday in the secondary market. The secondary market auction cancellation weighed on the secondary rate giving fruition to the central bank’s objective. The gauge closed at 5.61 per cent Friday.
“As part of the liquidity management strategy for 2021-22, the Reserve Bank’s objective would be to ensure orderly evolution of the yield curve and to avoid volatility in the G-sec market,” said RBI governor Shaktikanta Das at the MPC meet.
“This would help create pre-conditions in financial markets that support a durable economic recovery,” he said.
The benchmark sovereign yield rose to 6.18 per cent amid concerns of another economic contraction. The gauge dropped to 6.04 per cent Friday, pushing prices up.
The spread or differential between triple-A rated 10-year corporate bonds and the benchmark paper narrowed to 60 bps now from 100 bps a month ago. For shorter duration papers, spreads have not yet narrowed much.
“Corporate borrowers are likely to come back ending a dry-spell in the market prevailing now,” said Ajay Manglunia, managing direct -debt capital market at JM Financial. “While the RBI already showed robust intent to check rising yields, MPC minutes only validated it.”
“We expect buoyancy in corporate bonds once the second wave of virus starts receding,” he said.
As the curve on the government papers is more or less flattening a lot than the steepness it was carrying 1-2 months ago, yields on corporate bonds in shorter tenor have hardened a bit in same propensity.
Friday’s weekly auction cancellation was the second such incident in a row after the third week of April.
Fluctuations in sovereign yields weighed on corporate yields as investors turned apprehensive of economic cost of localised curbs on mobility.