Indian firms are keeping away from raising funds through the corporate bond market on concerns of further monetary tightening to contain 13-year high inflation and tight cash conditions in the money market.
A 25-basis-point increase in the level of deposits that banks must set aside took effect on the weekend, following a similar rise two weeks earlier. The two increases drained 180 billion rupees ($4.2 billion) from the banking system.
Last month, the Reserve Bank of India (RBI) raised its key lending rate twice, by a total of 75 basis points. The yield on the benchmark five-year corporate paper has risen about 45 basis points in the last one month.
"Inflation is still in double-digits and has raised uncertainty about another round of tightening," a merchant banker with a private investment bank said.
India's wholesale price index rose 11.91 per cent in the 12 months to July 5, lower than a Reuters poll forecast of 12.05 per cent, data released last Thursday showed.
The yield on Reuters' benchmark five-year corporate paper was at 10.76 per cent, lower than 10.81 per cent a week ago. The spread between the five-year corporate and government debt was at 119.4 basis points, slightly higher than 115 basis points last week.
Overnight cash rates, a barometer of cash supplies in the money market, traded at 9.50/9.75 per cent on Monday, way above 6 per cent when cash conditions are comfortable.
The central bank infused Rs 52,300 crore via its repo auction, which traders said indicated very tight cash conditions in the system.
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