Easy liquidity to boost Commercial Paper, CDs

Street hopes for a further cut in MSF rate

The Reserve Bank of India (RBI)'s 50 basis point cut in the marginal standing facility (MSF) rate on Monday is set to boost issuances of Certificates of Deposit (CDs) and Commercial Papers (CPs), as rates of these instruments fell on the back of easy liquidity.

RBI cut the MSF rate to nine per cent on Monday. The central bank had cut MSF on September 20 in the mid-quarter review of monetary policy. Apart from the MSF cut, government spending will also boost liquidity, said experts.

Issuance of CDs and CP had dried in mid-July after RBI raised the MSF rate by 200 basis points. The regulator, then, had to resort to other liquidity tightening measures to arrest volatility in the rupee against the dollar.

CDs and CP are money market instruments where the tenure is under one year.

"Since the MSF rate has been cut further, CD and CP issuances will be more. The MSF rate might be cut again in the next monetary policy review to be detailed later this month. The cut may be by another 50 basis points, to bring down the MSF rate at 8.50 per cent and reduce the corridor between repo and the MSF rate by 100 basis points. If that happens, then CD and CP rates will come down further and issuances will get a boost," said Arvind Konar, head of fixed income, Almondz Global Securities.

On Tuesday, ING Vysya Bank raised Rs 300 crore by CD for a one-year maturity tenure at 9.06 per cent, while Karur Vysya Bank raised Rs 50 crore by issuing a one-year CD at 9.04 per cent.

 

A few CP issuances, too, hit the market on Tuesday. Aditya Birla Nuvo raised Rs 50 crore by issuing two-month CP at 9.04 per cent, while Magma Fincorp raised Rs 100 crore by issuing a two-month CP at the rate of 9.25 per cent.

"The base rate of banks will be costlier due to which we can probably see companies opting for CP. Liquidity has started flowing into the system to the tune of Rs 40,000-45,000 crore through government spending. Besides, there is maturity of cash management bills of about Rs 52,000 crore between October 17 and October 22. This would help bring down CD and CP rates further," said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.