Over the past year-and-a-half, as the Reserve Bank of India has raised interest rates and progressively drained the banking system of excess liquidity, the spreads between government bond (Gsec) yields and AAA-rated corporate bond yields have shot up.
The rate of interest that companies pay to investors to raise money through bonds is determined by yields on Gsecs. A higher spread implies a rise in borrowing costs for companies vis-a-vis what the government pays to raise funds.
AgenciesWhile the spreads for 5-year and 10-year AAA corporate bonds are still lower than the historical average of 43 basis points and 50 basis points, respectively, the gap has increased significantly from just 1 bps and 6 bps at the end of April 2022, data provided to ET by CRISIL Market Intelligence and Analytics showed. One basis point equals 0.01%.
At the time, the RBI had not yet started raising interest rates, while liquidity was in a surplus of more than ₹5 lakh crore.