Banks and non-banking financial companies (NBFCs) resorted aggressively to the use of certificate of deposits and commercial papers, respectively, to meet their funding gaps. Consequently, spreads in the money market have risen since July, the RBI said in its latest Financial Stability Report.
Ease in system liquidity in the months of July and August, driven by higher government spending and change in the stance of the Monetary Policy Committee, led to ease in softening of short-term money market rates as well as government bonds and corporate bonds, the report added.
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This led to fall in short-term rates faster than long-term rates, known as ‘bull steepening’ in the market parlance. Owing to this, the term spread (10-year G-sec minus 91-day T-bill) in the government bond market rose marginally to around 27 basis points between July and December as compared to 18 basis points between January and July.
In the corporate bond market, NBFCs remained the largest issuers with private placements being the most preferred method of raising funds. Amidst moderation in direct funding from banks, NBFCs attempted to diversify their funding sources through higher issuance of listed non-convertible debentures (NCDs), the report said.
As a result, NBFCs accounted for 37% of the share in corporate bond issuances, followed by banks at 17%.
Banks and corporates together subscribed to nearly two-thirds of NCD issuances during FY25. Spreads in the corporate bond market has shown a mixed trend across rating categories. For AA category, the spreads have widened since June. Moreover, some select low-rated borrowers, below AA category, were also able to raise funds at a competitive price in the primary market issuances.
For NCDs, average spread has risen year-on-year. Currently, the median spread of NCDs of below AA category in the primary market is around 350 basis points, a rise of 50 basis points from 2023. In the secondary market for the same category, the spread is above 400 basis points against 350 basis points in 2023.
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Whereas, for the AA-rated ones, in 2023, the spread in the primary market was close to 200 basis points,
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