Non-bank lenders remained the largest bond issuers with a 47% share in the first half, followed by corporates and banks at 33 and 20%, respectively, compared to 50, 40 and 10%, respectively, compared to at S1FY22. , according to the report.
Thanks to exceptional sales in the second quarter, overall bond issuance increased to Rs 3.3 lakh crore in the first half, and the agency expects sales of Rs 3.7 to 4.2 lakh crore in the second half of FY23 slightly higher than a year ago, taking the volume of outstanding bonds to Rs 41-42 lakh crore by March 2023. However, this translates into moderate annual growth of only 4-5%, net of redemptions, with additional issuance increasing by Rs 7-7.5 lakh crore, up from Rs 6.8 lakh crore in FY22.
The agency attributes the weak volume growth to the rising interest rate regime, which will force issuers to offer higher coupon rates/higher yields, which could increase investor appetite.
The agency expects yields on the 10-year G-Sec (government securities) to harden to 7.7% in the short term and to remain between 7.3 and 7.7% in the long term, which will also cause corporate bond yields to rise.
Even though domestic bond issuance more than doubled in the second quarter, external commercial borrowing (ECB) remained subdued due to rising overseas funding costs.
In the first five months of FY23, ECB approvals sought from the Reserve Bank fell 24% to $8.3 billion. Given the larger increase in policy rates by central banks and the resulting higher costs of borrowing abroad, overall borrowing costs for domestic firms have been higher than domestic financing costs and should remain so in the short term.
While the RBI’s policy tightening is likely to continue, the magnitude of the incremental hikes could be less than that seen since May 2022.
Icra plans gradual increases in key rates until December 2022, with an increase of 25 to 35 basis points followed by a pause. Additionally, with a large government borrowing program and a gradual rate hike of 25 to 35 basis points, 10-year G-Sec rates are expected to harden to 7.7% in the near term and remain between 7. 3% and 7.7% in the long term.
The agency projects net outflows from the foreign portfolio investors (REITs) segment of $8 billion to $13 billion in FY23, compared with an outflow of $16 billion in FY22. But that could fall if the US Fed indicates lower than previously quoted rate hikes in the future.