New 10-year bond set to bring down borrowing costs for India Inc

The new 10-year benchmark bond, which is considered as the key parameter to price corporate bonds on the street, is expected to be auctioned in the first quarter of the new fiscal at a coupon rate much below the existing one. Experts believe it could be auctioned as early as April when the government borrowing calendar begins.

The existing 10-year benchmark bond 8.40% 2024 has an outstanding of Rs 76,000 crore as on February 24 and once the new paper is auctioned, the existing security will become illiquid. 

“The new 10-year benchmark may hit the street sometime in April-May. The coupon rate of the new 10-year bond may be somewhere around 7.55-7.58% in current scenario,” said Bekxy Kuriakose, head, fixed income, Principal PnB Asset Management Company. 

According to Kuriakose, this may lead to spread contraction between 10-year G-sec and corporate bonds of similar maturity due to which cost of borrowing by way of 10-year corporate bonds may turn out cheaper. 

Interest rates have been falling and the street is awaiting at least one more rate cut in the current calendar year after the two rate cuts by the Reserve Bank of India (RBI) in January and March. The RBI cut rates by 25 bps each time, bringing the repo rate by 50 bps in total to 7.50%. The repo rate is the rate at which banks borrow from the central bank and RBI has been cutting it due to comfort on the inflation and fiscal consolidation front. 

The gross market borrowing of the government is pegged at Rs 5.56 lakh crore for next fiscal compared with Rs 5.92 lakh crore this year. 

A K Sridhar, chief investment officer of IndiaFirst Life Insurance explained that cost of borrowing could come down by 25 bps in first quarter of next fiscal and said that there could be a further 25 bps reduction in interest rates. He added that there could be more crowding of borrowing in the first half. 

Typically, the borrowing programme of the government is front-loaded as a result of which about 60% of the borrowings are completed in the first half (April-September) of every fiscal. The borrowing calendar for the first half of next fiscal will be released later this month. 

“The new 10-year benchmark bond is expected to come in the first quarter of next fiscal and it is possible that it may be issued in April itself,” said S Prabhu, head of fixed income at IDBI Federal Insurance. 

Meanwhile, the yield on the 10-year benchmark bond 7.71% on Thursday compared with its previous close of 7.69%. 

RBI’s first bi-monthly monetary policy statement for the fiscal of 2015-16 will be released on April 7. The guidance given by RBI is that further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment.