Not so long ago, April to September used to be called the slack season for banking activity; the October-March period was the busy season. This was because credit cycles for both agriculture and industry loans used to take off post the Kharif harvesting.

The Reserve Bank of India, till the early 2000s, used to come out with its monetary policy, then called the credit policy, suited for the slack season and, separately, for the busy season. More credit was made available during the busy season.

But all that has changed in recent years; with greater industrialisation and more services companies vying for bank credit, credit flows are not impacted much by intra-year cyclicality.

Bond issuance picks up in the latter part of the year. This is the reason why the government tries to finish off up to 60% of the market borrowing before the corporate sector jumps in with its issuance.

But the way April has started, indications show bond issuance will take place at a scorching pace this financial year.

This April has been red hot for the bond market.

A total of ₹445 billion has been raised between April 1 and April 26. This is almost 3 times what was raised in April last year.

Much more than the business cycles, it appears the reasons for the surge in issuance are opportune.

Bond Issuances Surged In April As:

The Budget provisions led to a surge in mutual funds inflows, thereby boosting demand for bonds. Investments into debt mutual funds were to attract short-term capital gains tax from April onwards. So investors pumped in money into mutual fund schemes before the new rules to kick in.

The RBI's Monetary Policy Committee, for the first time since its May 2022 off-scheduled meeting, did not raise interest rates in April. Investors now believe the rates may have peaked; hence, now is the best time to lock into bond investments.

Since May, the RBI has raised its repo rate by 250 basis points to 6.5% in six sets of hikes.

Many issuers had deferred their issuances in view of the persistent increases in interest rates by MPC. Now that MPC may be done with rate hikes, but in no mood to cut interest rates in a hurry, issuers have started tapping into the markets.

The provisions in the Budget that hurt the issuance of market-linked debentures by NBFCs also prompted the shadow banks to step up the issuance of bonds.

Time To Buy

The action seen this foretells what is likely this year.

Bond issuances will likely hit a record high in 2023-24, topping last year's ₹8.2 trillion. According to a report in Thomson Reuters, an estimated ₹9 trillion could be raised in the current financial year.

Moreover, marquee investors like HDFC and HDFC Bank could lighten up the market. Several banks, including state-owned ones, will likely tap the market with Tier-I and Tier-II bonds.

A surge in capital expenditure can bring big manufacturing companies as well to tap the market. That apart, several government-owned entities could tap the market as the government has projected a massive ₹10 trillion of capital expenditure in 2023-24.

Also, NBFCs will likely remain heavy issuers this year as demand for finance from these entities is strong as well. According to a report from Fitch, some large NBFCs, that are prominent bond issuers, are likely to target 25% growth in loan growth.

The sector had slowed down after troubles at IL&FS. NBFC loans grew a mere 7% CAGR in 2019-22. According to a report in Informist Media, Cholamandalam has said it plans to raise ₹500 billon this year and that it had tested the waters with a public issue of ₹10 billion of bonds earlier this month.

Several municipal corporations, too, are likely to tap the market. The government has shortlisted more than 30 cities with good ratings to tap the municipal bond market, according to media reports. Megacities like Chennai are expected to tap the market.

Issuers will likely prefer the bond market because bank lending rates have risen sharply due to the MPC's rate increases last year. Whereas, bond yields have eased significantly from their recent highs.

The 10-year government bond yield has eased to 7.10% from around 7.40% seen last year. It will likely test 7.00% levels in the next few days. Prospects of falling yields will likely keep investors, particularly institutional ones, interested in corporate bonds.

2023-24 will see a record market borrowing of ₹15.4 trillion by the government. It may well end up being a record for non-government bonds too.