The Rise and Rise of Interest Rates
The impact on bond issuances in JFM 2023
New issuances in the corporate bond market took a breather in January as most borrowers borrowed their fund needs earlier in anticipation of a rise in interest rates. In perspective, the Reserve Bank of India (RBI) has raised the key policy rate five times in 2022, from 4.00% to 6.25%, and then by another 25 basis points in February 2023.
And the RBI has not given any indication of halting the rise in interest rates, as it keeps a tight watch on inflation. Retail inflation, which is measured by the Consumer Price Index (CP), rose to 6.52% in January. This is significantly higher than the RBI's upper tolerance limit for CPI at 6%.
Why the hurry in borrowing?
Because most of them anticipated that the government, the issuer of gilt securities and the benchmark for the risk-free rate, would be a larger borrower in FY24. That would mean companies would be competing with the government, which would get to issue bonds at a lower rate, given their risk-free status.
Reports quoted data from the National Securities Depository Ltd show that fundraising by companies in January fell 44% month-on-month to Rs 63,700 crores. But the amount was significantly higher on a year-on-year basis when the amount collected was Rs 25,200 crores.
Of course, there was no hurry to raise money in January of 2022 because the RBI had not started raising interest rates.
As interest rates rise, the market may become more volatile, with prices for bonds and other investments fluctuating more frequently. By raising money quickly, bond issuers might have wanted to take advantage of these changing market conditions and secure lower rates before conditions change again.
The government plans to borrow a record Rs 15.4 lakh crores via gilts in FY24, compared with Rs 14.21 lakh crores, to give a push to capital expenditure and meet expenditure needs. Will this borrowing plan crowd out borrowers from the private sector? Not necessarily.
But private sector borrowers could end up paying higher rates for raising funds via new issuances.
Fewer fixed-income assets to buy?
Does the fall in new issuances of corporate bonds mean that there will be fewer fixed-income assets to buy that could play into investors' minds?
With fewer bond issuances available, investors may face challenges in finding suitable investment opportunities. The increased demand for existing bonds could drive up their prices, potentially leading to lower yields.
In this scenario, fixed-income investors should be cautious and consider their investment objectives, risk appetite, and time horizon.
One option could be to diversify their fixed-income portfolio by investing in alternative fixed-income products, such as bank fixed deposits, small savings schemes, or debt mutual funds. Such products offer varying interest rates, maturities, and risk profiles, which can help investors find an investment product that best suits their needs.
Invest in short-term maturities?
Another option would be to buy the Government of India's treasury bills, from the RBI's retail investor portal, which has maturities of up to 365 days. You could then sell these bills in the secondary market, through a broker and invest if a top-rate long-term maturity bond issuance comes up.
Investors could also consider investing in high-quality bonds that have already been issued and have a stable credit rating. These bonds may offer lower yields than newly issued bonds, but they could provide more stability and reliability to investors' fixed-income portfolios.
With rising interest rates, fixed-income investors may have to recalibrate their portfolio allocation to minimize the impact of interest rate changes on their investments. Investors could opt for RBI's floating rate savings bonds that adjust to changes in the interest rate environment.
The RBI's floating rate for these savings bonds is fixed at 35 basis points higher than the rate offered by the National Savings Certificate scheme.
While many options are available, it is advisable to seek the advice of a financial advisor before taking an investment decision.
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