FOCUS: Corp bonds seen benefitting from global listing of India gilts
Informist, Monday, Sep 25, 2023
By Subhana Shaikh and Asmita Patil
MUMBAI – The inclusion of Indian government bonds into JPMorgan's Global Bond Index after a long wait is likely to reduce crowding out and pave the way for increased demand for corporate bonds, industry players believe.
A total of 23 government bonds valued at $330 bln are now eligible for inclusion in JPMorgan's Global Bond Index – Emerging Markets suite over a 10-month period starting Jun 28. This inclusion, which is expected to bring in additional inflows, is likely to buttress the Indian rupee and have a positive impact on government bond yields.
"(This) will create some appetite for government bonds from FPIs (foreign portfolio investors). The expectation is that 10-year government securities yield at 7% is likely to be the new normal, and that yields are likely to go below 7%," said Ajay Manglunia, managing director of JM Financial.
The expected strong demand from foreign investors will lead to a fall in gilt yields, making domestic investors–who used to heavily invest in government securities–start looking for other investment options such as corporate bonds, market participants said.
Brokerages have projected inflows of $24 bln–$40 bln in government bonds from the index inclusion.
Some inflows into the bond market are expected even before June, but a huge quantum is expected later in 2024-25 (Apr-Mar).
Mutual funds that have discretionary funds could increase their corporate bond holdings and banks that predominantly buy gilts might start looking for other alternative opportunities in order to increase their return on investments.
"A simple impact is that G-sec demand supply dynamics will improve resulting in lesser crowding out effect, so there will be space created for corporate bonds. If you see the yields falling, then obviously, more and more corporates will start accessing the bond market," said Deepak Sood, head of fixed income and partner at asset management fund Alpha Alternatives.
SUPPLY SIDE DYNAMICS
A fall in government bond yields is also likely to boost the primary market supply of corporate bonds as companies and financial institutions may rush to the debt market to take advantage of lower rates, market participants said.
Some market participants believe a 15-20 basis points fall in government bond yields could lead to 5-10 bps fall in yields of corporate bonds, going forward.
"Normally, in the corporate bond market, demand is certainly more than the supply, especially in longer tenure bonds, and if there is good demand from foreign investors, the spreads (between government securities and corporate bonds) will definitely start getting down, but it will take its own sweet time," said Laukik Bagwe, vice president at DSP Mutual Fund.
Currently, the spread between the benchmark 10-year government bond and that of National Bank for Agriculture and Rural Development's AAA-rated bond is 25-30 bps.
"Yields will fall and issuances will pick up. Capital markets are more efficient than bank borrowing…this year is going to be the highest amount of borrowings from the corporate bond side," Manglunia said.
Market participants are of the view that the fundraising through corporate bonds will be in the range of 9.0-9.5 trln rupees in the current financial year, as compared to 8.83 trln rupees in 2022-23.
"If you assume $30 bln worth of flows into government securities…maybe another 40,000-50,000 crore (400-500 bln rupees) of fresh supply (in corporate bonds) over and above normal year-on-year growth will be seen," Sood said.
The push from the Reserve Bank of India to diversify their resources will also draw more non-banking financial companies to the corporate bond market amid rise in credit offtake.
Bond offerings by NBFCs will also gain traction in the near future as the increased exposure of bank credit to non-bank lenders has come under the RBI's radar recently.
"Corporate bond supply will also depend on whether the industry is expanding or not. Most of the credit uptick has happened on the retail side, while wholesale and corporate side is still maintenance capex rather than brownfield or greenfield capex, and I don't see it happening," said Sandeep Bagla, chief executive officer at Trust Mutual Fund.
Only time will tell how the increased inflows in government bonds will help the corporate bond market. End