RBI’s Long-Term Repo Operations Lead To A Spurt In Bond Borrowings

The Reserve Bank of India’s long-term repo operations have led to a spurt in bond issues with firms rushing to take advantage of lower costs.

The central bank has concluded two rounds of LTRO, infusing a little over Rs 50,000 crore at the benchmark policy repo rate.

Data from Bloomberg shows that bonds worth Rs 64,700 crore were issued between Feb. 10 and Feb. 21, 2020—a 54 percent increase over the amount raised in the previous two weeks.

It was the week immediately after the announcement that saw the big spurt. Close to Rs 54,500 crore in bond issues was concluded between Feb. 10 and Feb. 16, 2020, according to Bloomberg data. Around 16 bonds worth over Rs 10,100 crore were issued last week, 13 of which were issued on the same day as the first LTRO auction.

So far this year, a total of Rs 2.08 lakh crore worth of bonds have been issued compared to Rs 1.10 lakh crore during the same period last year, according to Bloomberg.

WATCH | RBI Gives LTRO Boost To India’s Bond Markets

The RBI announced the LTRO facility, with one-year and three-year tenors, for up to a total of Rs 1 lakh crore at its sixth bi-monthly monetary policy meeting this year on Feb. 6.

While the operations were eventually targeted at pushing up bank lending, which has been sluggish, its impact is first playing out via the bond markets. Interest rates on short-term government and corporate borrowings have fallen in response to the RBI’s announcement, giving firms an opportunity to raise money at lower costs.

Some of the firms that have jumped in to take advantage of the lower rates include non-bank lenders like Housing Development and Finance Corporation Ltd., Shriram Transport Finance Co. Ltd. and Muthoot Finance Ltd. Companies like Tata Cleantech Capital, Grasim Industries Ltd., and UltraTech Cement Ltd., too, have also taken advantage of the improved market conditions. The tenure of borrowings ranged from one year to five years.

Each company has seen a drop in borrowing costs to a varying extent when compared with previous borrowings for a similar tenure, the data shows.

According to Arvind Chari, head of fixed income and alternatives at Quantum Advisors, the LTRO facility is allowing companies to refinance at cheaper costs. AA-rated NBFCs and corporates, which turned to overseas financing last year, are receiving investor interest in the local markets once again.

“The combination of excess liquidity and low interest rates is benefiting the non-PSUs and non-AAA rated corporates and NBFCs. But a significant amount is going towards refinancing and not fresh lending,” he said. “The LTRO aims to reduce borrowing costs in the bond markets and increase refinancing, but it cannot drive genuine fresh credit from banks.”

Suyash Choudhary, head of fixed income at IDFC Asset Management Co. Ltd., said that the RBI, via its unconventional policy tool set so far, is attempting to achieve two objectives.

One is to facilitate the transmission of rate cuts so far and, therefore, influence the price of credit. The second objective is to push up credit growth, combined with other incentives for lending to certain borrower categories, he said.

“While this may indeed nudge banks on the margin, a meaningful rebound in credit growth will depend upon both demand for such credit as well as banks’ own risk perception of a certain set of weaker borrowers,” Choudhary said.

The RBI has so far concluded half of the planned Rs 1 lakh crore in LTROs. At the first auction, for three-year funds at the repo rate of 5.15 percent, the central bank received bids for eight times the amount it intended to infuse. At the second LTRO auction on Feb. 24, for one-year funds, the RBI received bids worth five times the amount it intended to infuse.

Auction dates for the remaining Rs 50,000 crore in LTROs are yet to be announced.