State-owned borrowers in India are increasingly struggling to sell shorter-dated bonds as investors demand higher premiums due to rising market uncertainties and rate outlooks, leading to some issuances being withdrawn.
AAA-rated state-owned borrowers are finding it harder to sell shorter-dated bonds as investors press for a larger premium to give up liquidity and duration flexibility. Even with abundant cash in the banking system, market participants say buyers are unwilling to commit funds for two to three years at current yields, preferring instruments such as Treasury bills and commercial paper that can be rolled over more easily as rate expectations change.
That pattern has already forced some issuers to pull planned sales. Business Standard reported that Power Finance Corporation withdrew a proposed three-year bond after bids came in at higher yields than it was prepared to accept, even as it completed a 15-year issue at a 7.55% cut-off coupon. The state-owned lender has also scrapped other planned offerings in recent months when investor demands ran above its target levels.
Traders and debt-market participants say the problem is less about funding availability than about price. Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, said investors were seeking a bigger spread to compensate for uncertainty around the interest-rate and inflation outlook, while issuers were reluctant to pay up when other funding routes remained open. Large borrowers can still turn to commercial paper, bank loans linked to external benchmark rates and, in some cases, foreign-currency borrowing.
The divide between short and long maturities remains striking. Investors with regulatory or portfolio-duration needs are still willing to lock into 10-year or 15-year AAA-rated public sector issues if the absolute yield is attractive, but they want more compensation for taking shorter-duration exposure amid concerns over inflation, crude oil prices, the rupee, West Asian tensions and possible food-price pressure from the monsoon. The Reserve Bank of India is also draining surplus liquidity through its management operations, adding to the cautious tone in the market.
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