ANALYSIS - Corporate debt squeezed in costlier climate

By Anurag Joshi

MUMBAI (Reuters) - Heavy government borrowing risks elbowing out corporate issuers in India already reeling under rising interest rates and shrinking liquidity, with borrowing costs expected to rise 50-75 basis points by the end of 2008.

Bond originators say normally there are 20-30 billion rupees ($470-700 million) of domestic bonds in the pipeline a month as financial institutions raise funds for infrastructure projects.

But at the moment only about 7-8 billion rupees worth are in the offing with issuers put off by higher interest rates, after the central bank tightened monetary policy last month, and with investors hesitant at a time when 12 percent inflation is eating into returns.

The market is also nervous government borrowing, scheduled to total 960 billion rupees in April-September, will exceed the gross 1.45 trillion rupees planned for all of fiscal 2008/09 as subsidies and the cost of a farm loan waiver mount.

Extra borrowing would squeeze demand for corporate bonds in an illiquid market and debt arrangers say firms could struggle to find investors for their higher risk, less liquid bonds.

"High government borrowing is a negative for interest rates and also for companies looking at raising money. Also with liquidity squeezed, the investment activities of banks take a back seat," said J. Moses Harding, executive vice-president at IndusInd Bank.

India has a cap of $1.5 billion on foreign investment in corporate debt and the pool of investors is not deep as those with big pockets, such as provident funds, cannot invest more than 10 percent of their cash surpluses in private sector debt.

The few primary market borrowers are financial institutions but many are postponing fund-raising due to the rising cost.