With banks having raised Rs 25,000 crore of cheap money from the Reserve Bank of India (RBI) last week, they appear to be buying corporate bonds, bringing a little liquidity to a market that had virtually come to a halt. On Monday, Rural Electrification Corporation (REC) raised Rs 1,750 crore worth of 10-year money at a cut-off of 7.20%.
Corporate bond yields have fallen in the range of 100-150 basis points compared to last week, Ajay Manglunia, MD and head-fixed income, JM Financial, told FE. According to dealers, more than 50% of the REC issue was subscribed by a single large nationalised bank. FE could not independently verify the same.
Manglunia observed that there has been some participation by banks in the corporate bond market post RBI’s TLTRO (targeted long-term repo operations) auction.
"There is limited activity in the primary market and there is no hurry to raise funds since the RBI has given borrowers a repayment holiday. The TLTRO gives banks access to funds at a floating rate linked to the policy repo rate, to be deployed in investment grade corporate bonds and commercial paper. The opportunity is lucrative for banks because investments made under this facility will be classified as held to maturity (HTM) even in excess of 25% of the total investment permitted to be included in the HTM portfolio." Exposures under this facility will also not be reckoned under the large exposure framework, the RBI had said.
FE has learnt that banks have spoken to corporate bond arrangers to gauge the quantum of high-grade public sector unit (PSU) corporate bond issuances over the next two weeks. "Banks are willing to buy bonds belonging to some of the top rated PSU names. They ideally prefer the short-tenor category or close to 3 years," a source said.
As per the terms of the TLTRO, banks shall be required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including mutual funds and non-banking finance companies.
Since primary market issuance volumes have dropped in recent times and are expected to remain sluggish in April, banks may have to solicit investment options if they have to deploy the borrowed money within the stipulated time as stated by the RBI, a source said. Indeed, the central bank had notified during the auction of the first tranche of TLTRO that the funds availed under the facility would have to be deployed within 15 working days from the date of the operation. However, the central bank has extended this time period in the second tranche of TLTROs worth Rs 25,000 crore, announced on Monday. RBI notified that funds availed under this tranche of TLTRO would have to be deployed within 30 working days from the date of the operation.