Short-term rates dip after RBI rate cut

Certificates of deposit and commercial papers have dropped by 20-25 bps

After the Reserve Bank's rate cut on Wednesday, issuers are rushing to raise short-term funds. RBI cut the repo rate, at which it lends to banks, by 25 basis points to 7.5%. As a result, rates of short-term instruments such as certificates of deposit (CDs) and commercial papers (CP) have dropped by 20-25 bps.

"After the repo rate cut, people were happy to raise their short-term borrowings planned for March at better levels and yields were down by 20-25 bps. These issuers would have paid 20-25 bps more if they had raised before the rate cut," said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

CP issuance after the rate cut include names like L&T Finance for a tenure of two months at 9.05% and Aditya Birla Finance at 8.97% for similar maturity. IL&FS raised one-year CP at 8.95%.

CD issuance include IDBI Bank, which raised two to three-month deposits at 8.49%, Canara Bank's one-year CD at 8.46% and Andhra Bank's one-year CD at 8.47%.

"For the markets, the next three important events during the month will be the inflation data release, results of the government's gilt switch programme and release of its first-half borrowing calendar. Liquidity will remain tight and this might cause volatility in short-term/money market rates," said Bekxy Kuriakose, head, fixed income, Principal PnB Asset Management Company.

The deadline for paying the fourth instalment of corporate advance tax approaches later this month, due to which liquidity is expected to tighten. "There might be volatility of 10-15 bps. The advance tax outflows are yet to hit the system," added Kuriakose.

RBI data shows bank credit grew 10.39% year-on-year for the fortnight ending February 20. The cut in lending rates by banks are seen as limited to 25 bps. The base rate of most is currently in the range of 10-10.25%.