RBI: Swelling India borrowing places companies’ fate in RBI’s hands

By Rahul Satija and Divya Patil

India’s surprise move to boost its borrowing target leaves companies more dependent than ever on central bank stimulus, amid concern the government may crowd them out of fundraising markets.

Prime Minister Narendra Modi’s administration expanded its borrowing plan to an unprecedented 13 trillion rupees ($177 billion), the second increase this year as the pandemic hurts revenues on both the federal and state levels.

The Reserve Bank of India has so far prevented companies from falling short of cash by financing at least 1 trillion rupees of corporate-bond purchase by banks and using a mix of tools to keep debt yields under control. The greater government borrowing plan now makes such support even more crucial. Some observers are confident that the RBI will be able to continue to prevent a credit crunch.

“RBI has so far been quite successful in managing market expectations and helped stabilize the bond yields,” said Mahendra Jajoo, chief investment officer for fixed income at Mirae Asset Investment Managers Pvt. “With the increased government borrowing program, there is no reason to feel any more worried on that front.”

Still, an increase in funding costs for companies due to the government’s borrowing may strain corporate finances at a time when businesses are already reeling under the coronavirus pandemic.

Average yields on top-rated rupee corporate bonds maturing in five years rose as much as 15 basis points on Friday, the most since Aug. 25, before paring gains to an increase of 5 basis points, according to traders.

Rises in corporate yields are likely to be limited because companies’ demand for fresh funds is already low due to the Indian economy’s slump, and there’s ample cash in the nation’s banking system.

“The yields will stabilize with RBI’s continued accommodative stance,” said Jajoo.

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