Informist, Monday, Jan 1, 2024
By Subhana Shaikh
MUMBAI – The year 2024 looks positive for India's corporate bond market because of likely inflows into government bonds following their inclusion in JP Morgan's global bond indices and potential rate cuts by the Reserve Bank of India, but they may underperform government securities, market participants said.
Traditionally, the outlook on corporate bonds reflects the underlying sovereign bond market, which is seen bullish in the new year.
OUTLOOK 2024
Market participants believe the outlook appears favourable for the corporate bond market with inflation trending lower, the RBI likely to kick-off its rate cut cycle later in the year, elections unlikely to throw up a surprise, and the inclusion of Indian government bonds in JP Morgan's Global Bond Index – Emerging Markets.
The inclusion into global indices is expected to bring inflows of $25 bln-$30 bln into government bonds and could generate strong demand for corporate bonds as well, market participants believe.
"The (utilisation of) limits on foreign investments in corporate bonds have remained in the range of 15-16%, reflecting subdued inflows. Nevertheless, a rebound is anticipated from these lower levels, driven by increased appetite for credit spreads in a rate easing environment," said Ajay Manglunia, managing director of JM Financial.
The inclusion of Indian government bonds in global bond indices is expected to reduce crowding out and pave the way for increased demand for corporate bonds from domestic investors, who otherwise used to heavily invest in government securities.
"Increased participation by foreign investors would enhance the credibility of the Indian bond market and will make it easier for the government and the corporate sector to raise debt capital from global investors," said Pankaj Pathak, fixed income fund manager at Quantum AMC.
This comes at a time when the government's move to plug the tax arbitrage between fixed deposits of banks and debt schemes of mutual funds has somewhat hit incremental inflows into debt funds in 2023.
PRIMARY SUPPLY DYNAMICS
In 2024, AAA-rated public sector entities will continue to dominate primary market supply in the corporate bond market.
The RBI's move on risk weights would drive non-banking financial companies to the corporate bond market. The supply of infrastructure bonds by banks and state-owned entities that was in the limelight in 2023, is seen continuing owing to the government's thrust on infrastructure and credit growth continuing to outpace deposit growth.
Unlike 2023, when the market saw just one municipal bond issuance, 2024 is likely to see a sharp increase with a number of municipal corporations planning issuances to meet their funding requirements.
"Private sector corporates, including InviTs and REITs, can also provide tailwind support to the supply numbers...refinancing of foreign currency bonds through INR bond markets could also play out as an important theme in 2024," said Prasanna Balachander, head of treasury, ICICI Bank Global Markets Group.
Overall, merchant bankers expect the primary market supply to surpass 9 trln rupees in the current financial year, from 8.83 trln rupees in 2022-23 (Apr-Mar). So far in the current financial year, fundraising through corporate bonds is close to around 7 trln rupees, according to data compiled by Informist.
"Considering the expected change in stance and subsequent rate cuts from the MPC from June 2024 onwards, it is expected that corporate bond yields will drop quickly compared to bank loan rates. In all probability, next financial year fundraising should exceed current year figures," said Venkatakrishnan Srinivasan, founder of Rockfort Fincap.
Many expect fundraising through corporate bonds to cross 10 trln rupees in 2024-25. However, the exit of Housing Development Finance Corp Ltd from the bond market could affect the overall fundraising. In 2022-23, HDFC raised a total of 784.14 bln rupees through 11 bond issuances, according to data from the National Securities Depository Ltd.
GAME OF SPREADS
Overall, cooling inflation and a likely cut in repo rate by the RBI and inflows into government bonds from the inclusion in global indices would bring down yields on benchmark 10-year government bonds to 6.75-6.90% from the current 7.20%.
"The corporate bond yields may fall between 25 bps to 50 bps till December 2024," Srinivasan said. Currently, the yield on the 10-year benchmark paper issued by the National Bank for Agriculture and Rural Development is at 7.70%.
With yields on government bonds likely to fall sharper than corporate bonds due to the inclusion in global bond indices, the yield spread between corporate bonds and gilts is expected to widen further in 2024.
Currently, the spread between three- and five-year AAA corporate bonds and government securities is around 60 bps and 55 bps, respectively. The spread over 10-year corporate bonds and gilts is in the range of 35-37 bps.
So far in the current financial year, spreads between corporate bonds and gilts across tenures have widened by 15-20 bps, leaving room for further rise.
"Shorter tenor is seeing widening on account of tight liquidity in the market. However, going forward, spreads are not expected to come down anytime soon, but also, they will not move up significantly," Manglunia said.
All in all, corporate bonds would underperform gilts in 2024 as spreads are expected to only widen hereon. End
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