The primary market for corporate bonds and commercial paper has been drying up even though interest rates have hit rock bottom. Dealers said this was an unusual development.

There has been virtually no new issue in May except for a few securitised papers (below Rs 50 crore) and some structured obligations. Moreover, no proposals are lined up for a fresh debt issue till the middle of June.

The market had its last major issue of 10-year tenor from Exim Bank -- the 6.43 per cent Exim 2013 -- early in April.

Investment bankers attribute this to the recent developments in the foreign exchange market. The dollar has been depreciating against all major global currencies, prompting companies to meet their requirements through dollar-denominated loans in the form of external commercial borrowings.

Although there is enough liquidity, even frequent issuers like top-rated companies, public sector undertakings and financial institutions have not been entering the domestic market since dollar borrowings, both for long-term and short-term requirements have become very cheap.

Since the one-year London inter-bank offered rate or Libor is pegged at around 1.25 per cent, at a two percentage point higher rate a one-year dollar loan costs 3.25 per cent.

Even after taking a one-year forward cover, the overseas facility can be converted into a rupee loan at around 4 per cent, which is cheaper than domestic loan rates.

Besides bonds, activity in commercial paper is also dull since there are hardly any primary issues or rollovers of existing loans.

Investors who usually opt for corporate bonds due to their wide spread, against government security of corresponding maturity, are finding it difficult to do so since there are no primary issues.

Highly liquid commercial bonds like those of the National Thermal Power Corporation, the Power Finance Corporation and Hindalco are left with limited floating stock in the market.

"Investment decisions are difficult because even most of the liquid government bonds are available in limited stocks," said a market source. This has resulted in highly illiquid government securities and most of the existing commercial bonds being heavily traded.

This is a result of too much money chasing too few good quality paper.

To take the interest rate advantage, most companies are in the process of formalising their plans to buy back rupee bonds. In fact, most of them have lined up external commercial borrowings in dollars to finance their rupee bond buyback.

Barren patch

• No new issues in May except for securitised papers and some structured obligations.
• No fresh debt issues lined up till middle of June.