A sharp drop in interest rate coupled with favourable demand-supply dynamics has led to a pick-up in bond issuances during September-February 2017, says India Ratings and Research (Ind-Ra). The pick-up in primary bond market was also associated with low bank credit growth due to widening interest rate differential to bond.

Ind-Ra presents its third edition of Indian Corporate Bond Market Tracker with an aim to present a complete picture of developments in the domestic primary bond market in terms of sectoral composition, rating mix and commercial paper (CP) issuance trends. The study pertains to the private placement of bonds for September 2016 to February 2017.

Ind-Ra believes the sustainability of this trend will be dependent on market conditions in the coming days, due to an absence of any meaningful pick up in the overall demand for credit. As the trend suggests, overall issuances plunged following a rise in yield in February 2017.

Ind-Ra expects large borrower framework to affect conventional bank credit growth in a meaningful way only beyond FY18 owing to muted demand activities in the credit market. Moreover, subsequent to FY18, a larger number of corporates will need to tap bond markets for incremental capex-led growth aspirations as the threshold under the framework will be lowered to INR150 billion.

CP Issuances Remained Stable Bucking the Overall Trends: As opposed to the rise in bond issuances, short-term CP issuances remained sticky. The agency believes that the Reserve Bank of India’s decision on the current liquidity management is likely to realign overnight rate close to repo rate in the near future, which could determine the trajectory of short-term rates. The agency believes, new framework for raising fund through CP is pragmatic, but unlikely to impact overall activities in a meaningful way.

Ind-Ra believes that in an absence of any significant improvement in domestic economic activity, the overall domestic corporate bond issuances is likely to remain slow moving. The agency expects appetite for corporate bonds to remain in place owing to: (1) muted supply; (2) stable economic condition and attractive yields, which could draw higher investor preference, particularly foreign portfolio investors; and (3) an incremental demand from commercial banks in an absence of demand for credit.