Thu. Dec 1st, 2022

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Lack of liquidity in India market fuels woes at weaker borrowers

2 min read

A credit crisis facing lower-rated Indian borrowers is deepening and the lack of liquidity in the rupee corporate bond market is making matters worse.

The number of note sales by firms that don’t have an AAA rating has dropped to nearly a decade low this year, as fund managers seek refuge in the highest-quality credits. The extra spread that investors demand to hold short-term AA rated debt over AAA notes has also risen to its highest in about nine years.

The pandemic has made it harder for noteholders to sell lower-rated debt in a pinch. It is also prompting investors to eschew such securities due to concerns that smaller companies will be worst hit by the economic fallout. A funding shortage for smaller businesses — the bedrock of India’s $2.7 trillion economy — comes at a time when they need money the most to counter the financial impact of the crisis.

The importance of liquidity was dramatically illustrated to local bond investors in April when Franklin Templeton, a large investor in weaker Indian companies’ debt in recent years, abruptly shut six funds in the biggest-ever such forced closure in the nation.

“Investors like mutual funds are avoiding investments in non-AAA corporate bonds as there is a fear of illiquidity,” said Murthy Nagarajan, head of fixed-income at Tata Asset Management Ltd. “The other worry is that due to Covid-19, business operations have been hit massively. We still don’t know clearly what and how much exactly is the financial damage.”

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