With short-term rates firming up due to tight liquidity conditions, Indian corporates are opting to borrow long term to take advantage of the attractive rates by locking them in these uncertain times.
The banking system has a liquidity deficit of over Rs 2 trillion.
According to market participants, engineering conglomerate Larsen & Toubro (L&T) raised Rs 1,500 crore through 10-year bonds in December 2024.
It is expected to tap the market again to raise Rs 4,000 crore through 10-year bonds again. Similarly, Grasim Industries raised Rs 2,000 crore through 10-year bonds while UltraTech Cement raised Rs 1,000 crore through bonds of the same tenure recently.
Signifying the firming up of rates in the shorter tenure, even AAA-rated PSU entity Nabard recently raised Rs 4,412 crore from the debt market at a slightly elevated cut-off of 7.53 per cent through three-year bonds. In contrast, state-owned REC raised Rs 2,297 crore at 7.2 per cent through 10-year bonds.
Market participants indicated that the spread on shorter-tenure corporate bonds (typically three years) over government bonds of equivalent maturity is in the range of 50-60 basis points (bps).
In contrast, for 10-year corporate bonds, the spread over 10-year government securities typically falls between 25 bps and 30 bps.
India Inc
Near-term interest rates have gone up, and there is still some opportunity in longer-tenure bonds, prompting investors to take a more opportunistic stance, said a debt capital market source, adding that while discussions about a potential cut continue, there’s still uncertainty about when it will actually happen, resulting in issuers looking to protect themselves from interest rate risk and volatility by locking in fixed rates for longer durations.
Short-term rates have risen in the domestic debt capital market while long-term rates (on 10-year and 15-year bonds) remain attractive.
Insurance companies and pension funds, which are less affected by tight liquidity in the system, typically prefer investing in longer-tenure bonds.
This demand has contributed to more favourable rates on long-term bonds compared to shorter-tenure bonds.
With tight liquidity and expectation fading for rate cut immediately in the current financial year (FY25), as well as sticky inflation, persistent pressure on the rupee, and other factors, short-term rates have firmed up now.
Meanwhile, long-term rates remain attractive, leading to an inverted curve, said Ajay Manglunia, managing director & head-Fixed income, InCred Capital Financial Services.
Top notch AAA corporates are capitalising on this by borrowing at the longer end of the curve.
They are securing funds spread at 20/25 bps over 10-year government security and actually lower than state development loans.
Comfortable with this level, they are choosing to lock in rates by borrowing at longer tenures than opting for shorter-term borrowings, he added.
The short-term funding landscape remains challenged by persistent liquidity deficit.
However, AAA-rated issuers find a compelling opportunity in the current market dynamics, with attractive long-term yields and strong investor appetite providing a clear rationale for favouring longer-tenure instruments, allowing them to align their financing strategies with prevailing market conditions, said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
