According to Gurpreet Chhatwal, CEO of CRISIL Ratings, the corporate bond market in FY2024 will see headwinds, with a relatively stable interest rate environment favoring the market.
This observation comes even when Banks raise basic lending rates — the marginal cost of fund-based lending rates (MCLR) — to which corporate loans are linked, in response to a cumulative 250 basis point increase in repo rates since May 2022 to March 2023.
Chhatwal observed that in the rising interest rate scenario, the market often turns to bank loans because they are relatively cheaper and the bond market is what causes interest rates to rise much faster than banks.
Conversely, when interest rates start to fall or remain flat, the bond market tends to offer a more competitive position against bank loans in the high-rated segments.
“So we are now in a situation (where) rates have stabilized with the RBI deciding not to raise rates,” Chhatwal told analysts.
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He said that at this point, the bond market as well as the bank lending market are ready.
At its last meeting April 3-6, all six members of the monetary policy committee voted to keep the repo rate unchanged at 6.50% to assess progress made so far in transmission of a cumulative rate increase of 250 basis points between May 2022 and March 2023.
“So we see people who want to raise money are now preferring bonds and not looking to the alternative, which is bank loans.
“And also, as we see the rest of the year, at some point we are going to start to see interest rates come down. I think that usually benefits the bond market,” Chhatwal said.
While the policy repo rate (the rate at which banks withdraw funds from the RBI to overcome short-term liquidity disparities) rose 250 basis points (bps) from May 2022 to March 2023, The average annual MCLR of banks increased by only 140 bps over the same period.
In contrast, the benchmark external lending rate (involving retail and micro, SME loans) saw the full transmission of a 250 bps increase in interest rates. repo rate.
India Research and Ratings (Ind-Ra) suggests that monetary policy transmission in the banking system could strengthen in 2024, as the MCLR of banks increases sharply by 100-150 bps y/y. period last year.
According to the latest monthly newsletter of the Reserve Bank of India, the announcement of the Corporate Debt Market Development Fund (CDMDF) as a backup vehicle to purchase investment-grade corporate debt securities in times of stress has created confidence in the corporate bond market.
Primary market corporate bond issuances increased to ₹3.9 lakh crore for the second half of fiscal 2023 (to February 2023) from ₹2.5 lakh crore for the respective period of fiscal year 22, according to RBI’s latest monetary policy report.