By Anurag Joshi
The Reserve Bank of India’s move to drain excess cash from the financial system may have inadvertently ruined the debt party for the nation’s weaker borrowers.
Average yields on three-year rupee bonds rated BBB have risen 28 basis points this week through Thursday, on track for their biggest weekly increase since 2018, according to data compiled by Bloomberg. Borrowing costs for top-rated issuers have climbed by a similar amount, but they generally have greater access to funding than weaker peers.
The surge comes after the RBI announced plans last week to restore normalcy to liquidity operations in markets in a phased manner. The central bank’s action comes after market interest rates fell below RBI desired levels, but Governor Shaktikanta Das will have to be careful in calibrating changes so as to avoid unintended consequences for the weakest borrowers.
“Rising borrowing costs will hurt plans of lower-rated firms to refinance debt, especially in near-term maturities and increase pressures for them to access funds,” said Ajay Manglunia, managing director and head of institutional fixed-income at JM Financial Products.
Weaker domestic firms have been the biggest beneficiaries of unprecedented fiscal stimulus and record-low benchmark interest rates delivered by the central bank to support Asia’s third-biggest economy from the economic fallout of the virus. Buoyed by such measures, economists expect Indian growth to bounce back in the coming fiscal year, even as the pandemic looks set to push the nation into its biggest contraction since 1952, according to government estimates.
The Reserve Bank of India plans to absorb 2 trillion rupees ($27.3 billion) from the local banking system via a 14-day reverse repurchase auction on Friday, according to the central bank.
To be sure, yields on three-year rupee notes ranked BBB are still about 160 basis points lower than they were at the start of 2020 before the pandemic engulfed markets globally, according to Bloomberg-compiled data. The RBI has also reiterated that it will ensure availability of ample liquidity in markets, as companies continue to face stresses from the pandemic.