Mumbai: India’s surprise move to increase its lending target is leaving companies more dependent than ever on central bank stimulus, amid concerns that the government could push them out of fundraising markets.
The government, Prime Minister Narendra Modi, has expanded its borrowing plan to an unprecedented 13 billion rupees ($ 177 billion), the second increase this year because the pandemic is hurting federal and state revenues.
The Reserve Bank of India has so far prevented companies from falling short by financing at least 1 trillion rupees of corporate bond purchases by banks and using a mix of instruments to keep debt yields under control. The government’s larger loan plan now makes such support even more important. Some observers are confident that the RBI will be able to prevent a credit crunch.
“RBI has so far been quite successful in managing market expectations and has helped stabilize bond yields,” said Mahendra Jajoo, Chief Investment Officer at Fixed Income at Mirae Asset Investment Managers Pvt. “With the increased lending program for the government, there is no reason to feel more worried up front.”
An increase in financing costs for companies as a result of government borrowing could hurt corporate finances at a time when businesses are already plagued by the coronavirus pandemic.
The average yield on top-rated corporate bonds, which matured in five years, rose to 15 basis points on Friday, the most since August 25, before increasing profits by 5 basis points, according to traders.
Increases in corporate returns are likely to be curtailed as demand for companies on new funds is already low due to the downturn in the Indian economy, and there is enough cash in the country’s banking system.
“The returns will stabilize with RBI’s sustained accommodating attitude,” Jajoo said.
Source: Gulf News