Short-term rates ease; firms to shift to commercial papers

The Reserve Bank of India (RBI)’s move to reduce the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5 per cent with immediate effect is set to result in short-term rates easing and companies shifting from bank borrowings to the commercial paper (CP) market.

In July the MSF rate was raised from 8.25 per cent to 10.25 per cent to arrest the volatility in the rupee. The move failed to tackle the volatility; it raised short-term rates significantly, due to which borrowing through short-term instruments became costly.

After the central bank announced the cut in the MSF rate on Friday, call money rates and rates of collateralised borrowing and lending obligations (CBLO) fell sharply. The weighted average call money rate stood at 10.04 per cent, compared with 10.26 per cent on Thursday; the weighted average CBLO rate fell from 10.22 per cent to 7.76 per cent.

“In today’s policy review, directionally, there was a signal RBI would reduce short-term rates in the coming weeks. In the near term, we expect a further fall in rates of short-term instruments and, therefore, CP issuers would return to the market. Between July 15 and August 31, we saw a decrease of about Rs 50,000 crore in outstanding CP, as CP borrowers opted for bank borrowings. We should see a substantial amount of that coming back to the market,” said R Sivakumar, head of fixed income and products, Axis Mutual Fund.

On Friday, State Bank of Travencore raised Rs 200 crore through certificates of deposits (CDs) at a rate of 9.62 per cent for a year, while Aditya Birla Finance raised Rs 50 crore through CPs at 10.18 per cent for two months. Bajaj Finance raised Rs 50 crore through CPs at 10.18 per cent for two months.

“The 75-basis point cut in MSF would have a beneficial impact on the short-term side. The interest rates on CPs and CDs would ease in the coming days, and that should reduce the borrowing cost of companies. Liquidity may improve in the days ahead due to inflows from foreign institutional investors into the market and from non-resident Indians into foreign currency non-resident (bank) deposits. This would ease the pressure on short-term interest rates,” said Abizer Diwanji, national leader (financial services), EY India.

It is expected borrowings through CP would increase from October. “At the end of a quarter, many CP/CDs mature, due to which from the first week of October, we would see many re-issuances in the market,” said Arvind Konar, head of fixed income, Almondz Global Securities.