In an effort to deepen debt markets, SEBI has mandated that large corporates should raise 25% of their borrowings from the debt market. Large corporates are listed companies who have outstanding long-term debt of more than Rs. 100 Crores and a credit rating of at least AA.

When it comes to financial markets, a deeper market is often better for investors, regulators, and the economy as a whole. This is because a market with depth is more transparent which means price discovery is better. So, instruments trade closer to their fair value and the market can be well-regulated. Depth also encourages participation, which in turn can promote economic growth. Deep markets are associated with better liquidity and more stability.

SEBI’s mandate implies that 2019 could see an increase in corporate debt issues. So, corporates will no longer only borrow from banks, they will also borrow from the market. In one of our previous notes, we highlighted the scope for the spread between AA and AAA securities to increase. A deeper market means that securities will become more fairly priced and this spread will only become more pronounced.

 

Investment Strategy:

Quality remains paramount. A decompression (or expansion) in spreads could see AA portfolios witnessing a mark to market loss. Recovery from these movements could take a while. Keeping the current market conditions in mind and the RBI’s stance, we would stick to our approach of creating layered portfolios. With every up move in yields, investments need to be locked in.

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