Commercial paper market returns to life after interest rate cut

Companies are thronging to the debt market to raise short-term funds as the market is offering attractive interest rate differential for both issuers and investors. There have been commercial paper issuances to the tune of Rs 7,500 crore after the 50 basis points (bps) rate cut announced in the annual monetary and credit policy on Tuesday. Typically, there are issuances worth Rs 1,500 crore-3,000 crore every week.

Commercial papers (CPs) are debt instruments issued by companies to borrow funds for up to one-year maturity. Other than usual issuers like non-banking finance companies, there were borrowers from the fast moving consumer goods, power and infrastructure industries.

“The correction in the yield curve was far better than the reduction in banks’ base rates post policy rate cut,” said Ajay Manglunia, senior vice president, Edelweiss Securities. Rates on CPs maturing in three months fell by 50-100 bps while a few banks reacted with base rate cuts of 25 bps last week. Companies raised funds for three months via CPs at 9.3-9.4 per cent on Friday. These rates had risen to 11.85 per cent levels in the previous month.

While banks’ base rates are around 9.75-10 per cent, borrowers are also charged spreads over the base rate, which make loans expensive as compared to CPs.

Improvement in fund flows with mutual funds that are major investors in CPs has also led to fall in rates. “From the investor point of view, rates on CPs are better than those on other debt instruments,” said a bond dealer with a domestic brokerage. Rates on certificates of deposits (CDs) that are issued by banks are currently lower by 10-15 bps. Also, issuances of CDs have fallen on lower demand from banks.

Market participants said this month is bound to see higher issuances, as liquidity may improve on the back of increased government spending. There are inflows of Rs 7,000 crore-8,000 crore lined up in the form of government bond redemptions next week.

Liquidity deficit was around Rs 1,00,000 crore — Rs 80,000 crore last week. Banks borrowed about Rs 1 lakh crore for three days from the Reserve Bank of India’s repo window on Friday. In the last week of March, repo borrowings had inched up to Rs 2 lakh crore on the back of tight systemic liquidity.