Borrowing Costs on a Declining Trend

Published: 11th October 2014 06:00 AM  |   Last Updated: 10th October 2014 10:56 PM   |  A+A-

MUMBAI: Borrowing costs for companies could get cheaper without the Reserve Bank of India (RBI) having to cut its repo rate. Initial signs include cut in deposit rates by banks, unremitting decline in global crude oil prices, and reduction in planned market borrowing by the government, and a muted demand for credit by large companies.

Punjab National Bank on Friday decided to pay less on its deposits. It will pay 25 basis points less interest rates on deposits of three different maturities of between 30 days and 365 days. The second largest state-run bank follows the leader, State Bank of India, which cut retail deposit rates on select maturities by 25 basis points on Sept 18 and  Oct 7. IndusInd Bank too had trimmed its deposit rates.

Analysts expect more banks to follow suit as demand for loans lag accretion of deposits. As of September non-food credit grew 11 per cent, which was the lowest since June 2001, according to the Reserve Bank.

Most bank chairmen concede that they expect any serious pick up in corporate credit demand only a couple of quarters later. The Index of Industrial Production (IIP) data for August grew 0.4 per cent, compared with 0.4 per cent in July, the government said on Friday.

“There’s has been a rally in corporate bonds, and rates on commercial paper, certificate of deposits and PSU bonds have come down,” said Shashikant Rathi, head of debt capital markets at Axis Bank.

“By not cutting rates and by doing open market operations the RBI is hinting its discomfort with any further decline in rates. If the RBI keeps off the 10-year yield could even test 8.25 per cent by December.”

Easing the pressure on bonds market, the government plans to borrow about `8,000 crore less than initially planned.

Supporting the government’s hands is the sustained slide in crude oil prices. Brent crude fell from $114 a barrel in August 2013 to $89 a barrel now.

Sale of bonds by the government to fund its expenses is the single biggest factor affecting bond yields. Yield on the 10-year G-secs has declined to 8.45 per cent now compared with 9.1 per cent in March. The RBI is avoiding cutting the repo rate as long as retail inflation is not in its comfort zone.

“Demand for funds has almost collapsed,” said Rupe Rege Nitsure, chief economist and GM at Bank of Baroda. “Until November-end bond yields will have a tendency to decline. Improving fiscal consolidation and today’s IIP data favor bonds. Ten-year bond yields could decline to as low as 8.35 per cent in October,” she said. Yield on corporate bonds will follow suit.


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