In ICRA’s view, Transmission of repo rate cuts to banks’ lending rates remains slow and in smaller increments compared with that in the debt capital markets, which continue to react faster to changes in policy rates. Following the 25 bps cut in the repo rate in the October 2016 policy, the differential in rates on debt capital markets and bank lines for similar tenures has widened further. The high net inflows into key segments such as Mutual Funds and Insurance Companies continue to help debt capital markets retain the edge over banks, at least for better rated entities.
According to ICRA research, in the current quarter too, bonds and commercial papers persist as important sources of funds for higher rated entities. On the back of strong CP issuance volumes in excess of Rs 5 trillion for the second quarter in a row, the commercial papers outstanding saw a 29.9% y-o-y increase at end September 2016. Similarly, owing to continued robust issuances by entities in financial services sector, the corporate bonds outstanding witnessed a 17.7% y-o-y growth as on September 2016. Accordingly, bonds and commercial paper outstanding is now as large as 34.2% of the banking system credit as on September 2016 (31.7% as on September 2015), says ICRA in the report.
Gross ECB inflows more than doubled sequentially in Q2 FY2017 to US$ 5.95 billion after witnessing sequential decline during Q4 FY2016 and Q1 FY2017, owing to some large refinancing and on-lending transactions. ICRA expects, ECB flows to remain opportunistic as the fall in local bond yields and bank lending rates limit the attractiveness of fully hedged ECBs. Karthik Srinivasan, Senior Vice President and Co-Head-Financial Sector Ratings, ICRA Limited, said “As investor risk appetite picks up, issuance of Rupee denominated bonds in the off-shore markets can pick up and provide alternate source of funds for borrowers; however overall pricing will remain key, as yields have softened sharply in the domestic debt markets”.
FII and FDI flows also improved during the quarter ended September 2016 both on an annual as well as sequential basis. Notwithstanding the imminent volatility around the US Presidential elections and a possible start of rate hike by the FOMC later this calendar year, FII inflows are expected to get a further boost as the effect of the various reform measures undertaken by the GoI begin to translate into improved corporate earnings profile while the FDI inflows will be supported with the closure of two impending large transactions in telecom and Oil sector.
The domestic bank credit growth has remained low in the current year, falling to 9.0% by mid October 2016 from 10.9% y-o-y as on March 2016. Industry credit continued to be the prime drag on credit expansion, with only a marginal 0.9% y-o-y growth as on Sep 2016, while the retail, agriculture and services sector continue to report strong traction.
“On account of the relative attractiveness of the debt markets, asset quality concerns of Banks, delays in broad-based capacity expansion and modest working capital needs of the corporate sector, bank credit growth is likely to remain in the range of 11-12% for FY2017”, Karthik added.
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