Fringe benefit of demonetisation: Credit cost falls sharply for India Inc

By Divya Patil

India’s Prime Minister Narendra Modi has pleaded for patience after his currency recall led to long and angry lines at banks. One group hasn’t had to wait long for the benefits.

Companies can now raise funds in the local bond market at cheaper costs, after the move sparked a flood of canceled cash into banks that have plowed the money into debt securities. Investors also profited as rupee corporate bonds had their best month in more than three years in November, amid the worst losses for global debt in a quarter of a century.

Modi needs companies to put to work the more than Rs 8 lakh crore ($117 billion) deposited into banks since his attack on corruption began on Nov. 8, to offset any impact on consumer demand in the world’s fastest-growing major economy. Firms from billionaire Kumar Mangalam Birla’s cement unit to the nation’s largest power producer have sold bonds at less than 7 per cent for the first time since 2010.

“Borrowing from the corporate bond market is a steal right now as demonetisation has cut financing costs,” said Dwijendra Srivastava, the Mumbai-based chief investment officer for debt at Sundaram Asset Management Co. “The drop in bond yields will help companies refinance debt, fund capex and make acquisitions at a cheaper rate.”

The average yield for three-year AAA corporate notes in India slumped 45 basis points in November, the biggest monthly decline since 2013. The rally contrasts with pain elsewhere. The Bloomberg Barclays Global Aggregate Total Return Index lost 4 per cent in November, the worst slump since the gauge’s inception in 1990.

Indian businesses have borrowed a record Rs 3.96 lakh crore from the bond market so far in 2016.

“The momentum of higher issuance is likely to continue even next year as bonds offer companies better rates over bank loans,” said Jayen Shah, Mumbai-based head of debt capital markets at IDFC Bank Ltd., who expects the Reserve Bank of India to cut the benchmark rate by 25 basis points this week. “I expect rare and atypical issuers to tap the bond market.”

Modi’s step voided 86 per cent of currency in circulation. While the increase in bank liquidity could push up asset prices, in the shorter term the reduction in usable currency may help authorities fight inflation they have already reined in to the lowest in 14 months.



Eros International Media Ltd., a Bollywood filmmaker and distributor, is considering an issuance. Andhra Pradesh Capital Region Development Authority plans to raise 20 billion rupees via bonds to fund the development of a new center of government for the southeastern state.

India’s economy, which grew 7.3 per cent in July-September from a year earlier, is seen slowing to 6.5 per cent in the fourth quarter as Modi’s shock decision damps consumer demand. That’s raised bets the RBI will ease monetary policy in its Dec. 7 review. The benchmark 10-year sovereign yield fell five basis points on Monday to 6.19 per cent and is down 157 basis points this year.

The central bank is analysing the impact of the decision and will list the implications at the review, BloombergQuint reported, citing RBI Governor Urijit Patel.

“Demonetization is the main factor that has led to the sharp drop in corporate bond yields,” said Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary Dealership Ltd. “Many issuers are waiting for the monetary policy decision and outlook, and are expected to tap the bond market going forward.”