Indian bond yields hit 13-month low boosting borrowing prospects for corporates

Indian bond yields have seen a sharp fall this week with yields reaching the lowest point in 13 months. Although yields had been declining after the monetary policy on April 8th, the pace of the decrease has intensified recently, indicating a covert rally.

In fact, the decline over the last two days is eight basis points, but it is 20 basis points from the policy day and 40 basis points from March 1st. This implies that corporations can now borrow from the bond market at a half-percentage-point lower rate. It is noteworthy that the current yield is the lowest since April 8th of the previous year, which is a significant development.

The fall in bond yields can be attributed to various factors, including the recent drop in US yields, which have decreased by 3.50 percent in the past month. Furthermore, the anticipation that both the Reserve Bank of India (RBI) and the Federal Reserve will cease rate hikes, as well as the possibility of a US recession slowdown, has led to a decrease in crude oil prices, which currently stand at 75. As a result, this decrease may eventually be passed on to consumers.

However, the primary reason for the decline is the increased number of buyers in the market. The major purchasers include the HDFC twins, HDFC Bank, and HDFC, which are required to comply with the statutory liquidity ratio (SLR) at 22 percent for the combined balance sheet on the day of the merger, which is expected to occur in June or July. Consequently, these two entities have made significant purchases, with 18 percent of the new HDFC balance sheet being devoted to a sizable sum of money.

Insurance companies have also emerged as significant buyers in the market. Following the budget announcement that tax benefits will not be extended to policies with premiums over 5 lakh, many high net worth individuals purchased such policies, generating a large amount of money. To invest this money in bonds over time, insurance companies entered into forward rate agreements (FRAs) with banks, who in turn warehoused these bonds for subsequent years. This led to a significant amount of buying in the market, contributing to the almost half a percent drop in yields and resulting in a reduction in the cost of capital.

While the cost of capital has decreased, it remains unclear how long this trend will persist. According to dealers, there could be a temporary dip below 7 percent, with trading hovering around 6.9 percent. However, as the Indian government continues to hold weekly auctions, the floor will likely stabilize at around 7 percent.

Nevertheless, there is always the possibility of unforeseen events, such as India's inclusion in the bond index, that could impact the market. Despite this uncertainty, the sudden drop in the cost of capital is expected to have positive implications for growth.