Business News

NEW DELHI: THE corporate credit market is booming like never before with foreign institutional investors pumping money into Indian debt and companies looking to raise more funds through overseas borrowings and commercial papers. The new base rate regime for bank loans and the government's decision to raise foreign institutional investment (FII) limit in debt have been the clear game changers. The new RBI guidelines permitting repurchase of corporate bonds could broaden the corporate bond market further. Close to $10 billion have flown into the Indian debt market this calendar year alone. Investment by local banks in commercial paper has surged from Rs 25,188 crore in March 2010 to Rs 37,863 crore in August. Is the moribund Indian debt market finally showing signs of life 18 years after it was opened up to global money? "The current set of circumstances have been favourable for the Indian bond market," said Abheek Barua, chief economist with private sector lender HDFC Bank . "The FII inflow into the debt markets has primarily been on account of the huge interest rate differential," he said. India's 10-year sovereign bonds are offered at more than 8% yield, compared with the near zero rates prevailing in most of the developed world. This too when the rupee is rising, which means FIIs buying Indian sovereign debt do not need to hedge their investment. While the surge in foreign investments into Indian debt is largely due to an increase in global liquidity, but that local markets can absorb these flows is a good sign. Even with the impressive growth in volumes in the bond markets, there still exist many hurdles, highlighting the need for more reforms. While experts differ on the exact steps to be taken, there is some agreement that even now the debt market is too shallow. Several experts are in favour of removing the witholding tax so that foreign financing becomes more attractive. Earlier this year, RBI and market regulator Sebi issued fresh norms requiring entities regulated by them to report all their transactions in the form of commercial papers and certificates of deposits. More foreign funds are likely to flow into debt with RBI raising rates for the sixth time this year and the US Federal Reserve announcing the second round of quantitative easing to spur growth. The other significant development is the increased tendency by corporates to issue more commercial paper, which could set the stage for bigger corporate adventures in the debt market. Commercial paper is essentially a short-term bond that is used to raise working capital funds. "The rise in commercial paper issues has been the fallout of the base rate regime," said Madan Sabnavis, chief economist at ratings firm CARE . The base rate regime, which came into effect on July 1 this year, requires banks to set a rate that will be offered to the highest rated companies and no borrower can get funds below this rate. In the earlier prime lending rate regime banks would declare a rate, but the bulk of the lending was usually below this rate. This regime has made companies explore the commercial paper route, where they can raise funds at far cheaper rates. "The main driver is the arbitrage between the CP rate and the base rate," said Jai Shukla, head of treasury at Viom Networks. Another reason is that companies are able to raise short-term funds through commercial paper more easily than from banks. "CP rates are driven by liquidity in the markets," Mr Shukla said. There has been a corresponding increase in the business of some rating firms. "Our business has increased based on companies getting short-term ratings," said Karthik Srinivasan, senior vice-president and financial sector head of ratings firm ICRA . Economists think a successful experience with the commercial paper could encourage corporates to go in for debt of slightly longer tenure, helping to establish a healthy corporate bonds market that is at present limited mostly to financial institutions and very select AAA-rated companies. The easy availability of bank funds had so far made companies reluctant to approach the financial markets. Finer rates could see them diversify their borrowings. The budget provision allowing tax-free infrastructure bonds has also created a window with engineering firm Larsen & Toubro coming out with an offer recently. Mr Barua, however, cautions that a lot more needs to be done in the long-term debt market. "The yield curve is still not liquid enough," he said.