Recent reports indicate that such entities have been underwriting heavy debt offerings in one day, which has resulted in the supply saturation that has compelled investors to reconsider their positions. This total that is being demanded by states and state-owned companies amounts to approximately ₹49,200 crore (roughly $5.49 billion). This influx of supply is especially untimely for the market, which is already finding it difficult to absorb the amount of central government securities that already exists. The proportionate size of the issuance scheduled on Tuesday underlines an increasing imbalance between demand and supply that is starting to change the perceptions of bond market participants throughout the nation.
Impact and debit details
The close figure of approximately ₹50,000 crore is made up of a number of high-value contributions by the different sectors of the public. The state governments are the only ones seeking to raise over ₹33,200 crores in their debt sales. Such quantity marks 25% higher than the originally intended schedule of issuing the states, indicating a sense of greater rush or a change in the financial needs at the regional level.
The entry of states, in addition to the major Public Sector Undertakings (PSUs), into the arena to raise capital, is also a possibility. Power Finance Corp is trying to raise ₹6,000 crore, and the Bank of India has declared that it is planning to raise ₹10,000 crore through the issuance of infrastructure bonds, in particular.
Analysts in the bond market have also indicated that such supply is creating a clear imbalance. Nikhil Aggarwal, the CEO of the group and founder of Grip Invest, noted that the domestic market is going through a time of increased supply both by the PSU companies and the state governments, and this has inevitably caused a demand-supply mismatch.
The existing mood of the bond market is not entirely comprehensible without referencing the latest changes in the policy of the Reserve Bank of India. Since the RBI decreased its policy repo rate on December 5, the yields on the different fixed-income assets have increased sharply.
Although low yields are normally the result of a rate cut, the response of the market has been different in this case since most investors have started betting that the rate-cutting cycle has now come to an end. This view of a closed loop has caused a sell-off and consequently an increase in yields. An example is that the 10-year benchmark bond yield has risen by over 20 basis points since it hit its lowest levels during the day of the rate cut.
The effect of this is even greater on state and AAA-rated corporate bonds, which have seen their yields rise by 20 to 25 basis points. The issuers are discovering that the cost of borrowing is increasing even though the central bank had earlier worked to unlock the liquidity.
The indecision regarding whether further relief will be given by the RBI or the bank would remain stagnant has causing investors to be cautious and pursue higher returns to counter the possible risks. This behavior is specifically noticeable across various types of investors, such as banks in the private sector, mutual funds, and many are busy redefining their strategies so that they can deal with their exposure in this turbulent climate.
Critical factor and market focus
The performance of institutional investors, including insurance companies and pension funds, has been a critical factor in the current softness of the investor demand. These institutions have been historically known to offer a stable base of demand in the bond market; however, their recent lack of interest has already been felt in the ultra-long bond market.
The chief economist at the IDFC First Bank, Gaura Sen Gupta, observed that this particular weakness in the pensions and insurance demand has threatened the desire to buy the papers that have longer durations. With these large buyers either withdrawing or being more discriminating, the long-term debt market is under more pressure, and it is more difficult to find ready buyers of the long-term securities of states and PSUs.
To counter such conditions, investors in different groups are shifting towards less duration exposure. The general move towards abandoning long-term paper is to prevent being tied up by the rates, which may not be attractive in case the yields keep climbing. This movement to shorter periods is yet another thorn to the efforts of state governments and central organizations that tend to depend on long-term borrowing in order to finance infrastructure and developmental projects. The general shift to reduce duration risk has placed a choke point in the market, with the main supply being in the long-term segment, and the demand is being pushed towards the shorter end of the curve.
The market is also gradually becoming more concentrated on the projected imbalances in the coming financial year. The issues that are of great concern in the future are the high increase in the redemption of the central government securities and state government bonds. The overall gross supply of bonds is projected to be high as the old debt matures and must be paid or refinanced. This future cycle of redemptions will result in the fact that the fresh issuances hitting the market will be greeted with the necessity of constant refinancing, which will possibly keep the supply levels high over a long period of time.
Conclusion
The existing pool of debt sales amounting to $5.5 billion is a groundbreaking moment in the Indian bond market. The concurrent release by various states and large PSUs such as Power Finance Corp and Bank of India has resulted in an oversupply that is stretching the boundary of demand in the eyes of investors. As investors grow optimistic about the termination of the rate-reduction cycle conducted by the RBI and institutional purchasers, including pension funds, who are cautious, the market is growing through a tricky terrain of escalating prices and preferences. The shift to shorter payback and the impending strain of redemptions yet to come imply that the mismatch between the demand and the supply will continue to be at the forefront of policymakers and investors as they enter the new year.
Read the full article here