Short-term rates inch up, may stay under check

After staying benign for first few days of the month, rates on short-term debt instruments inched up today. The rates are now expected to stay under check on lack of credit demand up till the next policy action decides the future course.

The rates on short-term debt instruments like Commercial Papers (CPs) and Certificates of Deposits (CDs) increased in the second quarter after the Reserve Bank of India (RBI) resorted to two rate hikes. Also, there was a demand for funds to meet business targets and pressure on liquidity due to advance tax payments in mid-September.

“The rates had elevated because of rate hike and higher demand for funds at the end of the second quarter, but the liquidity is comfortable now,” said a bond dealer with a domestic brokerage.

RBI has hiked rates by 150 basis points since the start of the current financial year in order to tame inflation and anchor inflationary expectations. The central bank is set to review the rates again on October 25. Companies issue CPs, it is banks that issue CDs — for tenures less than a year.

At present, banks are issuing CDs at around 9.2 per cent for three months, around 9.4 per cent for six months and around 9.5 per cent for a year.

Companies are raising funds at around 9.6 per cent for three months, around 9.8 per cent for six months and around 10 per cent for a year.

With bank base rates in the range of 10-10.75 per cent, it will be cheaper for companies to raise funds via CPs. But issuances have been subdued because of lower credit demand.

“Primary issuances in the debt market,” said Ajay Manglunia, senior vice president, Edelweiss securities, “were lower as compared to usual quarter end volumes as demand for funds has come down.”

Reflecting better liquidity, repo borrowings from RBI also dropped from levels above Rs 1 lakh crore seen in mid-September. Also, the interbank call money rates were trading below the repo rate indicating lower demand for funds from banks.

Going forward, rates may inch up as issuances rise. “The rates are expected to stay broadly in the same range,” said a treasury official of a Mumbai-based public sector bank. “They may pick up slightly before the policy announcement by this month-end.”