Monetary policy impact

Short term rates ease; Corporate shift to CPs from bank loan

The Reserve Bank of India's (RBI) move to reduce the Marginal Standing Facility (MSF) rate by 75 basis points to 9.5% with immediate effect is set to result in short-term rates easing and corporates shifting back to the Commercial Paper (CP) market from bank borrowings.

In July the MSF rate was raised to 10.25% from 8.25% earlier, in a bid to arrest volatility in the rupee. The hike had failed to make a significant difference in arresting the volatility. But the hike had pulled up short-term rates significantly due to which borrowing through short-term instruments became a costly affair.

Today after the cut in MSF rates were announced, call money rates and rates of Collateralized Borrowing and Lending Obligations (CBLO) fell sharply. The weighted average call money rate soon at 10.04% compared with 10.26% yesterday. While the weighted average rate of CBLO stood at 7.76% compared with 10.22% yesterday.

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

Today State Bank of Travencore raised Rs 200 crore through Certificate of Deposits (CDs) at the rate of 9.62% for a maturity tenure of 1 year while Aditya Birla Finance raised Rs 50 crore through CPs at the rate of 10.18% for a maturity tenure of 2 months. Besides that Bajaj Finance raised Rs 50 crore through CPs at the rate of 10.18% for a maturity tenure of 2 months.

“The 75 basis point cut in MSF will have beneficial impact on the short term side. The interest rates on CPs and CDs will see ease in coming days, that should reduce borrowing cost of companies. Going forward the liquidity may improve in days ahead due to inflows from Foreign Institutional Investors into market and Non-Resident Indian’s money into Foreign Currency Non-Resident (Banks) deposits. This would ease pressure on short term interest rates,” said Abizer Diwanji, national leader, financial services at Ernst & Young India.

It is expected that borrowings through CPs will particularly increase from October. “At the quarter end there are many maturities of CPs/CDs 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.