Top corporate bond arranger expects spreads on highest-rated notes to widen

 "We think the RBI will guide liquidity toward more normal settings, which could lead to spreads widening on corporate bonds," ICICI Bank's top official said

ICICI Bank Ltd., one of India’s top corporate bond arrangers, expects spreads on the highest-rated local notes to widen further as the central bank begins to withdraw emergency liquidity.

The extra yield investors demand to hold AAA rated company notes due in one year over comparable government securities jumped to the highest since October last week and remains near that level. That came after the Reserve Bank of India on Jan. 8 announced plans to drain excess cash from markets.

Easy liquidity and record-low borrowing costs have been a crucial lifeline helping many companies make it through the financial fallout from the pandemic. But as economic data suggest India will bounce back strongly this year, authorities may need to pare stimulus further ahead. India isn’t alone in draining excess cash. China’s central bank is also taking steps to constrain excessive liquidity.

“We think the RBI will guide liquidity toward more normal settings, which could lead to spreads widening on corporate bonds,” B. Prasanna, ICICI Bank’s group head of global markets, sales, trading and research said in an email interview.

Yields on shorter bonds surged earlier this month after the Reserve Bank of India said it would withdraw 2 trillion rupees ($27.4 billion) via a 14-day reverse repo auction on January 15.