The primary market activity in the corporate bond markets is likely to remain stable in the near future but growth in the segment may take time to pick up due to weak capex plans by industries, says a report.

During the second half of the fiscal 2017-2018, the corporate bond market remained stable at Rs 1.52 trillion as against Rs 1.64 trillion in the April-June quarter, according to data from Prime Database.

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“We expect primary market activity in the corporate bond market to remain steady, however, growth will be protracted owing to muted capex plans for corporate India,” India Ratings and Research said in a report.

On the one hand, it said the bank recapitalisation programme could taper credit market share, and lead to a shift towards the bond market.

On the other hand, it suggested that the recent surge in bonds yields as against stable bank lending rates could reduce incentives to raise funds through bonds.

“The competition will be greater for higher rated entities. Thus, the primary corporate bond market is likely to report a muted growth,” it said.

In October this year, the government had announced an infusion of Rs 2.11 lakh crore capital into the public sector banks over a period of two years.

Out of this, Rs 1.35 lakh crore will be through the recapitalisation bonds, while the remaining Rs 76,000 crore would be from the budgetary support.

The rating agency believes that against stable bond issuances, short-term money market instruments, especially commercial paper (CP) and certificate of deposit (CD) could gain traction in the foreseeable future.

“The confluence of goods and services tax and a rise in input cost will push up the requirement for short-term funds, especially for entities with lower cash flows,” it indicated.

Gross CP issuances clocked Rs 2.51 trillion in the second quarter of FY18 compared to Rs 2.64 trillion in the first quarter of the current fiscal.

The report said excessive liquidity in the banking system post demonetisation practically exterminated requirement for CDs by commercial banks barring a few.

The situation has now reversed with average system liquidity reaching close to neutral levels, the rating agency pointed out.

“Thus, a rise in CD issuances by commercial banks cannot be ruled out, although the quantum will be susceptible to the overall credit growth in the banking system,” the report added.