The cost of lending to Indian corporation in the bond market is set to ease, as the central bank is expected to take further steps to reduce yields after the Monetary Policy Committee (MPC) emphasized the necessary steps to simplify the rate curve. The Reserve Bank of India (RBI) on Friday cancelled an auction of ‘a-year five-year paper’ series of Rs 11,000 crore in which bidders reportedly demanded five to seven basic bills, in addition to what the central bank was willing to offer.
“The cancellation of today’s short-term paper auction is another indication that the RBI is seriously pursuing yield management,” said Naveen Singh, head of trading at ICICI Securities PD. “It appears that there is a significant shift 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 that the RBI is intervening in the primary market to look at rising yields in a five-year paper,” he said.
The central bank withdrew the auction of a state-owned enterprise maturing in 2026 and bearing a coupon of 5.63%. The same paper produced as much as 5.71 percent on Friday in the secondary market. The cancellation of the auction in the secondary market is rated at the second level which gives fruition in the central bank policy. The gauge closed at 5.61 percent on Friday.
“As a part of the 2021-22 liquidity management strategy, the Reserve Bank’s goal could be to ensure the orderly evolution of the yield curve and to avoid fluctuations in G-sec markets,” RBI governor Shaktikanta Das said at an MPC meeting. “This will help create the previous conditions in the financial markets that support long-term economic recovery,” he said. The benchmark sovereign yield has risen to 6.18% amid concerns over some economic contraction. The gauge dropped to 6.04 percent on Friday, pushing prices up. The spread or difference between triple-A rated 10-year corporate bonds and the benchmark paper has dropped to 60 bps now from 100 bps last month. For shorter duration papers, the spread has not yet narrowed much.
“Lenders in companies are likely to return ending a dry-spell in the market prevailing,” said Ajay Manglunia, managing direct-debt capital market at JM Financial. “While the RBI has already indicated its primary focus on monitoring rising yields, MPC minutes have only confirmed it.”
“We anticipate buoyancy in corporate bonds as the second wave of viruses 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, the yield on corporate bonds in the short term has been equally difficult. The cancellation of Friday’s weekly auction was the second such incident in a row, after the third week of April. The decline in commodity prices measured the yields of companies as investors turned to fear the economic costs of localized curbs on mobility.
