The Reserve Bank of India (RBI) has shied away from hiking interest rates, largely because credit growth has failed to match up to its expectations. During November, the resulting surplus cash lying with the banking system has contributed to the decline in corporate bond yields which have slumped by 30-50 basis points to their lowest in nearly 3.5 months. The yield on the Reuters benchmark five-year corporate bond ended at 8.07% on Friday, the lowest since 30th July.
RVS Sridhar, senior vice president for treasury at Axis Bank explained, “Bond yields are falling as a result of the relief rally, post the RBI's monetary policy review, as no rate hikes have been carried out. The hike in statutory liquidity reserve (SLR) led to a bullish rally on potential increase in demand which has fed into the bond segment too. Availability of sufficient liquidity amid lack of credit growth has led to a rally and credit spreads have shrunk.”
“Indian banks are waiting for disbursement to happen but actual disbursement is not picking up. RBI has not tightened the money supply and has not increased the rate to ensure good economic growth; all these factors resulted in excess liquidity in the market,” said Gautam Jain, senior analyst, KBS Asset Advisors.
“When current interest rate is lower than coupon rate of corporate bonds, the value of bond goes up more than the face value (as there would be more demand for higher coupon rate bond) and when the bond value is more than the face value, yield goes down as the holder of a corporate bond will be getting same coupon rate of interest on higher value of bond,” Mr Jain added.
According to RBI data, total bank credit since January increased a mere 9.8% over the corresponding period last year. In comparison, credit off-take registered a robust 27.7% growth during the same period last year. This has caused RBI to revise its credit growth target to 18% from 20% earlier this year.
Speaking on future movements in bond yields, Mr Sridhar said, “In the short term I believe the rally would be sustained until we see any concerns from RBI or inflation concerns. The rally may end in December as markets prepare for the January monetary policy review.”
Mr Jain opined, “I think, till December 2009 end, it is likely to remain at this level and from January 2010 onwards, it should move up. RBI may increase the interest rate to tackle inflation in their 10th January policy meet. There would be a pick-up in credit growth as normally credit grows well in the last quarter. Hence, I think from January-February onwards the bond yield should start moving up marginally.” –Sanket Dhanorkar [email protected]