If you are pondering, how has it become attractive for the private sector? The news post-Interim Budget by Nirmala Sitharaman has made this possible. The highlight is that for FY 2025, the government has pegged the gross borrowing to 14.13 trillion, which is less compared to the gross borrowing of Rs 15.43 trillion in FY 2024.
The 10-year benchmark yield has also fallen by 8 basis points, which is now at 7.06%. This indicates positive news for the corporate sector, allowing them to raise more credit at slightly lower interest rates as the government will be borrowing less from the bond market.
What are Corporate Bonds?
How Does It Work?
- The competition in the market will reduce: The government is a considerable competitor in the bond market among the corporates which can divert investors away from being attracted to the corporates’ interest rates over the government’s sovereign guarantee. But when the government reduces its bond sales, it is allowing the corporate sector to attract as many investors as possible. That way, corporates get to leverage this situation.
- The yield of the government bonds reduces too: Along with borrowing less, it also reduces the yields on government bonds, so corporates will look lucrative that way compared to the government bonds in such a scenario.
- Freeing up money for corporates: The government borrowing less is in turn helping to free up the funds in the insurance companies, pension funds, and banks so that they can prioritize lending to the corporates rather than to the government.
- It creates liquidity in the market: When alternative safe investment havens such as government bonds are borrowing less in the market, it allows the bigger corporates who are financially healthy, to issue safer securities to the investors, creating greater liquidity when other options are creating less liquidity in the market.
Which Corporates Will Benefit Most From This?
Corporates in the infrastructure, power, steel, metal, and energy sectors that are capital-intensive will benefit a lot from this market sentiment. While there have been significant rate cuts to the government bonds, the corporates expect a rate cut for the corporate bonds as well in the near medium term.
In CY 2023, the corporates were successful in raising Rs 11 trillion with the aid of rupee bonds, this number could increase by 10 to 15% due to this announcement, as the corporate bonds will look lucrative for the investors. Now, when the government wants to reduce the fiscal deficit to 5.1% in the coming year, the means of doing it is only by reducing the amount of borrowing, and it is justifiable why the government is taking this step.
This is a good move, as usually, the government bonds will crowd the corporate bonds, which will negatively impact the ability of the corporates to finance through this means. In a scenario where the government bond issues are greater, the corporates have to put more effort into attracting investors by increasing their interest rates above the government bond interest rates, which can turn out to be more expensive for the corporates. For this reason, you normally see corporates issuing fewer bonds in the market compared to the government.
Will corporates issue stock in this case? Not really, as this comes at the expense of diluting the value of the pre-existing shares, and thus they don’t turn up to increase equity issuance, though the debt issuance is lower during higher government debt issuances. When the government has become less noisy in the market, safe corporate securities will fulfill the demand for the long term, and the institution will raise short-term security to fulfill the demand.
What is a Government Bond?
India’s Sovereign Debt Has Already Attracted Foreign Investors
As the equity valuation in India has become much more expensive, foreign investors are attracted to the sovereign debt securities for their quite lower valuation and their inclusion in the JP Morgan Emerging Bond Index, and it’s not just for this; it is also due to the improving finances of the nation.
While the sovereign bond market has already gained traction among investors, now it’s time for corporate bonds to make that noise as well. As Sitharaman herself announced, “the lower borrowings by the Center will facilitate a larger availability of credit for the private sector.” This is good for the nation’s growth!
