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India Corporate Debt Market Likely Muted Until December

By Harsh Joshi and Bijou George, Of DOW JONES NEWSWIRES

MUMBAI -(Dow Jones)- India's corporate bond market may remain lackluster until December, despite the central bank retaining an easy policy stance as borrowers may prefer alternative fund-raising avenues.

Cheaper bank loans and easier overseas credit availability may push borrowers to prefer them over issuing bonds locally, bankers told Dow Jones Newswires.

"With the (RBI) governor indicating that bank lending rates may have some more room to move further down at a time when he's indicating that the RBI may have to raise (policy) rates soon, the feeling is that borrowers may get a better rate on a loan than bonds," said Siddharth Shah, vice-president at STCI Primary Dealership.

India's syndicated loan volume has already reached $38.5 billion so far in 2009--the highest level on record, according to Dealogic data.

Although yields in the corporate bond market have also fallen, cheered by the RBI's decision to hold rates, traders said rates have bottomed out and bear an upward bias in coming months.

The yield on the five-year Rural Electrification Corporation bond has fallen to around 8.50% after the monetary policy review on Oct. 27 from 8.60%-8.65% earlier, traders said.

Buyers of corporate debt are also likely to seek higher yields after the recent sharp drop.

The Reserve Bank of India held interest rates steady when it reviewed its monetary policy on Oct. 27 and economists believe the tightening will only begin in the first quarter of 2010.

"One can safely say that six months down the line, corporate bond spreads ( over government bonds) should be at higher levels than they are now," said K. Ramkumar, head of fixed income at Sundaram BNP Paribas.

He expects the five-year corporate bond-government security spread to widen to around 200 basis points over the next six months from nearly 110 basis points now as the economy continues to recover from the financial slowdown.

New product innovations in the corporate bond market--such as a proposed repo facility--are likely to be of limited use, bankers said.

In the first place, the repo market will probably be for only a small group of top-rated companies. Also 10-year state loans, which are eligible for the repo facility, are quoting at fairly high spreads (80-100 basis points) over government paper. This gives players little incentive to offer corporate bonds and hence will not support demand much, debt fund managers said.

Meanwhile, demand for debt from India is picking up overseas as risk appetite returns. Last month, State Bank of India raised $750 million by selling five- year euro-bonds. Other lenders, such as ICICI Bank Ltd., Bank of Baroda, and Axis Bank are likely to use their medium-term note programs to tap global markets.

However, some public-sector companies--traditionally the most active players in corporate debt--are likely to continue with fresh issues.

Among the big players, Rural Electrification Corp., Power Finance Corp. and Nuclear Power Corp. of India are already prepared to sell bonds in the coming weeks, people familiar with the matter said.

-By Harsh Joshi and Bijou George, Dow Jones Newswires; 91-22-6145-6115; harsh.joshi@dowjones.com

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