Commercial paper issuances set to get boost as short-term rates ease

CP coupon rates dropped by about 20 basis points since RBI's second quarter review of monetary policy on Oct 29

Issuances of Commercial Papers (CP) are set to get a get a boost as the Reserve Bank of India (RBI) has eased the system liquidity further due to which short-term rates are trading between the repo rate and the Marginal Standing Facility (MSF) rate.

As per estimates of issue arrangers, CP coupon rates dropped by about 20 basis points since RBI's second quarter review of monetary policy on October 29.

CPs are debt instrument, with tenure less than a year, issued by corporates to finance working capital requirements such as inventories and payroll. Today IndianOil Corporate raised 1.5 month CPs at a coupon rate of 8,55%.

In the second quarter monetary policy review of RBI the MSF rate was reduced further by 25 basis points to 8.75% which makes borrowing under MSF cheaper. Besides that RBI also increased the liquidity provided through term repos of 7-days and 14-days tenure to 0.50% of banks Net Demand and Time Liabilities (NDTL) from 0.25% earlier.

“Yes, CP issuances will pick up. Government spending has happened in the first week of this month due to which liquidity in the system has eased and overnight rates have dropped. But we need to see if this easy liquidity will be sustained,” said Ramanathan K, executive director and chief investment officer, ING Mutual Fund.

The MSF rate was hiked in mid-July by the central bank to 10.25% in a bid to arrest volatility in the rupee against the dollar. But starting the mid-quarter review of the monetary policy held in September, RBI has been cutting the rate gradually. In mid-July after the hike in the MSF rate and other liquidity tightening measures of RBI, CP rates were hovering in double digits.

“When the repo rate becomes the operational rate, we can see CP rates softening further by about 25 basis points. The system may move towards repo becoming the operational rate within a month's time unless RBI decides to keep liquidity tight,” said R Sivakumar, head of fixed income and products, Axis Mutual Fund.

RBI too intends to make repo the operational rate. “There is a whole lot of liquidity that the RBI is providing now. What we would like to see is the operational rate come down to LAF rate and at that point we will take a call on how much liquidity we feel comfortable within the system,” said Raghuram Rajan, governor, RBI in the post monetary policy conference call fro researchers and analysts held last week.