By Divya Patil
Signs are emerging that India’s $277 billion (Rs 21 lakh crore) stimulus is helping reopen the bond market to smaller borrowers and easing the nation’s credit crunch. Issuance of local-currency corporate notes graded A+ and lower rose to a 15-month high of 51.7 billion rupees ($683 million) in June. Such offerings had plunged in April and May as the coronavirus pandemic and the world’s largest lockdown to contain it battered investor demand for risky assets in India.
The nation’s small businesses, which form the bedrock of Asia’s third-biggest economy, need to build cash buffers and restore operations as economic growth this year is set to shrink for the first time in four decades. India’s support measures have also helped cut borrowing costs for weaker borrowers, with the average yield on A-rated three-year company notes close to the lowest level since at least 2004.
“Policymakers’ stimulus steps are working as banks have begun buying bonds of lower-rated companies,” said Ajay Manglunia, managing director and head at JM Financial Products Ltd. “Risk-appetite is improving.”
To ease strains on corporate finances, the Reserve Bank of India since late March has funded banks’ purchase of 1.13 trillion rupees of company bonds and has cut benchmark interest rates to the lowest level since at least 2000. The government has also provided guarantees to 3 trillion rupees of collateral-free loans to small businesses and a 750-billion-rupee special credit line for the shadow banking sector.
But there are still challenges. Despite the jump in riskier bond sales, investor demand for the debt appears uneven. Total local-currency bond sales are still dominated by top-rated companies and it’s largely banks, which have to implement the economic stimulus steps, that are buying notes of lower-graded firms.
Other key players in the local credit market, such as mutual funds, have remained more cautious. For mutual funds to become more open to taking risk, there needs to be a recovery in economic and business indicators, said Bekxy Kuriakose, head of fixed income at Principal Asset Management Pvt.
“Investors are closely following the financial and quarterly results and sector-related impact as well as government stimulus measures,” she said. “The trend in coronavirus cases and how key states are handling the health crisis is also an important factor.”