Sharp rise in short-term rates to hurt companies

Companies borrowing short-term funds may have to wait a little longer before they can breathe easy. The short-term rates have been climbing steadily ever since the Reserve Bank of India began unwinding its accommodative stance on monetary policy early this year. The rise in rates could add to borrowing costs and eat into profits, analysts said.

Yield on one-year government bonds have risen sharply to 6.85 per cent from 4.48 per cent over a year earlier. Rise in longer maturity bonds have been much less, on the view that inflation is a short-term phenomenon. Yield on 10-year government bonds rose to 8.14 per cent from 7.34 per cent a year earlier, while five-year bond yields edged up 7.79 per cent from 7.37 per cent.

An immediate impact is rise in commercial paper (CP) rates, resorted to by several medium to smaller companies for working capital. Since April, CP rates have risen 275-300 basis points for a three-month paper, while the rates on one-year commercial paper rose 175-200 basis points, according to Derivium Securities, a finance firm involved in placement of debt.

Also, hurting companies is the rise in volatility in short-term paper, which complicates the sequencing of fund raising, senior State Bank of India officials said.

In the past few weeks, commercial paper rates climbed about 50-75 basis points. A top rated company is able to raise one-year funds at more than 8.25 per cent. The rise in financing cost has the potential to dent profitability of companies, said Kunal Shah, managing director of Derivium Securities, which is into placement of debt paper.

“These rates could take a few more quarters to return to lower levels,’’ said Naresh Takker, managing director, Icra Ltd. “The immediate trigger for short-term yields to rise was tightening of rates by RBI to counter inflationary concerns.”

Though inflation rate could begin to ease from next month, RBI may go ahead with another quarter percentage point rise in its policy rate, most likely in November, he said.

“The rise in short-term rates are reflecting the unwinding of RBI’s accommodative monetary policy stance post-Lehman,” said R V S Sridhar, president and head, global markets at Axis Bank.

“Liquidity may remain in deficit but given that credit growth is tight and inflation may ease, there is an even chance of a quarter percentage point rise in its rates.’’

Still, there could be a joker in the pack in the form of base rate of banks. In coming months, CP and CDS rates are likely to track the base rate of banks, say bankers. This will also increase the rates from the current levels.

“After enjoying low interest payment outgo for many quarters, companies will see a rise in financing costs, which could potentially hit the profitability,” said Shah.