Cash Crunch in India Flips Company Bond Curve as Debt Costs Riseby
Cost to issue short-term over long-dated debt highest in year
Yield curve could remain inverted until March: Trust Capital
India’s cash squeeze has flipped the corporate bond yield curve, making borrowers pay more for short-term debt than they have for almost a year.
The cost of issuing 12-month commercial paper has risen to 9.04 percent, which is 64 basis points more than average yields on notes maturing in five years, according to data compiled by Bloomberg. That’s near the widest spread since March 2015. The three-month Mumbai Interbank Offered Rate, a gauge of lenders’ short-term funding costs, has climbed 60 basis points so far this year.
Capital outflows, slower government spending and central bank intervention in the foreign-exchange markets are draining funds from the banking system, pushing up short-term money rates. Seasonal factors such as a pickup in credit growth toward the end of the fiscal year in March could put even more pressure on interbank liquidity, according to Morgan Stanley. Companies owe about 3.6 trillion rupees ($53 billion) of commercial paper, central bank data show, while local bond sales are off to the slowest start in eight years.
“Slow spending by the government and withdrawal of money by portfolio investors due to global uncertainty led to tightness in rupee liquidity,” said Sandeep Bagla, Mumbai-based associate director at Trust Capital Services India Pvt., the No. 3 arranger of rupee corporate bonds last year. “The yield curve is likely to remain inverted until March."
Foreign investors pulled $2 billion from Indian stocks this year amid emerging-market routs as Prime Minister Narendra Modi reined in expenditure to keep the budget shortfall to 3.9 percent of gross domestic product. Financial-system liquidity has also been hurt as the government’s surplus cash lying with the central bank has increased to 1.3 trillion rupees as of Thursday, triple that of two months ago.
Reserve Bank of India Governor Raghuram Rajan on Thursday said market participants have complained about the cash shortage and the central bank was aware of their liquidity requirements. The RBI said later that day it will conduct additional operations to inject liquidity into the banking system next month.
The central bank, which left benchmark borrowing costs unchanged for a second straight meeting last week, has already bought securities worth 300 billion rupees via open-market operations to address a cash shortage in the banking system. It will purchase an additional $4 billion of rupee-denominated securities this quarter, according to the median estimate of seven analysts surveyed by Bloomberg.
The RBI has also injected cash by selling repurchase agreements, while the government on Feb. 4 bought back bonds worth 166.5 billion rupees.
“With global uncertainty stalling portfolio flows to emerging markets, the RBI naturally has to provide permanent liquidity through OMO,” Bank of America Merrill Lynch economists Indranil Sen Gupta and Abhishek Gupta wrote in a report Feb. 5. “In our base case, the RBI will likely need to OMO another 200 billion rupees” by March, they wrote.
The cost of money market instruments also rose after the regulator on Jan. 11 lowered mutual funds’ limits on debt investments, said Trust’s Bagla. Since then, rates on three-month certificates of deposit climbed 89 basis points to 8.09 percent, while those on similar-maturity commercial paper shot up 76 basis points to 8.98 percent.
Indian firms issued 230 billion rupees of bonds so far this year, the least for that period since 2008, according to Bloomberg-compiled data. The lack of longer-dated sales has helped to cap yields on five-year notes, Bagla said. Issuers are on the sidelines as they expect the central bank to cut interest rates if the government shows fiscal prudence.
Rajan last week said the RBI will be watching the budget for the next financial year, to be presented on Feb. 29, before deciding its next move.
“Shortage of liquidity is the root cause for the curve inversion," said Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co. “Lack of spending by the government to meet its budget goals may have resulted in scarcity of cash."