Borrowing costs hit corporates

mumbai — Market borrowing costs for top-rated state-owned Indian companies — a key gauge for the nation’s corporates — have risen to their highest since January 2, 2015. The central bank’s rate hike and a change to the method by which investors must value local government bonds may still spell more bad news for corporates.

In its policy review on Wednesday, the Reserve Bank of India said that securities issued by state governments should be valued at market prices, rather than by the practice of uniformly marking such notes 25 basis points above equivalent central government yields. That change may reduce demand from Indian banks for state debt, with potential knock-on effects for corporate bonds, said Dwijendra Srivastava, chief investment officer for debt at Sundaram Asset Management Co, in a phone interview.

The yield on sovereign 10year rupee notes pierced 8 per cent last week for the first time since May 2015, with some traders pointing to the negative impact on investor sentiment from the valuation change because it may cause banks to book losses.

The average yield on AAA rated three-year bonds issued by state companies climbed 17 basis points last week to 8.63 percent, according to data compiled by Bloomberg. Five- and 10-year corporate bonds yields are already at 2014 levels, the data show.

“Demand-supply mismatch is pushing yields higher,” said Sundaram Asset’s Srivastava. Selling of corporate bonds by foreigner investors is also pressuring yields, he said. — Bloomberg