Short-term rates at 2-year high

Liquidity squeeze and policy-rate hike fears weigh heavy on borrowing costs.

The impact of tight liquidity and previous hikes in policy rates have started impacting the short-term money markets, ahead of the Reserve Bank of India’s (RBI’s) mid-term review of monetary policy. This means Indian companies bear the highest short-term borrowing costs in almost 20 months.

Rates for three-month commercial paper hovered at around 8.23-8.25 per cent on Thursday, up nearly 100 basis points (bps) over the last one month. The rates have increased by around 25 bps in the last seven to eight days, when liquidity was sucked out due to Coal India’s initial public offering.

“The primary reason is the liquidity squeeze, though there could be some impact of the wider expectation that RBI will raise rates,” said Ashish Parthasarathy, treasurer at HDFC Bank.

Banks on Thursday raised nearly Rs 89,000 crore through RBI’s repo window and overnight call rates touched a high of 8 per cent, with a weighted average rate of 6.58 per cent. With liquidity expected to remain tight, there may be no respite soon. Besides, dealers expect these rates to rise and move closer to the base rates of banks, which range between 8.0 and 8.5 per cent.

“Over the last few months, we have seen a part of the demand for working capital shift from banks to the money markets, as some companies have preferred to raise funds directly. If money market rates continue to rise, we will see some of the demand coming back to banks,” said the general manager of one of the largest public sector lenders in the country.

Bloomberg said that on Tuesday, L&T Finance sold three-month commercial paper at a yield of 8.2 per cent, according to data provided by Mumbai-based NVS Brokerage. Infrastructure Development Finance also sold similar-maturity debt at 7.85 per cent the same day, according to data provided by Mata Securities India.

Rates on certificates of deposit also moved up on Thursday, with three-month CDs at 7.60-7.80 per cent, against 7.50-7.70 per cent on Wednesday. However, CD issuances fell on Thursday as mutual fund houses steered clear of the market.

“Fund houses are facing redemptions from banks, which is a normal phenomenon this time of year as it is the festive season. Some mutual funds also prefer to hold cash,” explained a fund manager.