1. Rate cut expectations drag CP, CD yields by 30-40 bps since mid-May

Rate cut expectations drag CP, CD yields by 30-40 bps since mid-May

Yields on certificate of deposits (CD) and commercial paper (CP) have fallen by as much as 30-40 basis points...

By: | Updated: June 2, 2015 1:49 AM

Yields on certificate of deposits (CD) and commercial paper (CP) have fallen by as much as 30-40 basis points since mid-May with expectations of a rate cut gaining momentum over the last few weeks.

The Reserve Bank of India meets on Tuesday to review monetary policy.

CDs and CPs are used by banks and companies, respectively, to borrow short-term money. Yields have been trending down since mid-May on the back of rate cut expectations, sufficient liquidity and a demand-supply mismatch.

Market sources indicated that Vijaya Bank issued a three-month CD at 7.86% on Monday, while Corporation bank was able to borrow  money for two months at 7.8%. Andhra Bank had also issued two-month CD at 7.86%. In the middle of May, the rates on short-term CDs were in the range of 8.17-8.19%.

“The fall in money market rates is reflective of an expectation of a repo rate cut, along with a possible CRR cut. Any fall in the lending rate will directly have an immediate impact on the shorter-end of the curve,” said Lakshmi Iyer, chief investment officer-debt, Kotak Mahindra asset management company.

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Market participants are of the view that although some banks are issuing CDs, many seem to be holding back till further clarity emerges post Tuesday’s policy.

“The RBI has been doing its part to keep the liquidity at comfortable levels through its various term repo auctions.

However, there is still a demand-supply mismatch as banks have not started issuing CDs in a large quantum,” said a chief investment officer, fixed income, of an asset management company, who felt there could be a surge in issuances if some easing in rates happens in Tuesday’s policy.

What could push the yields up in the near future is a delay in the rate cut or an insufficient monsoon that could lead to inflationary pressures, prompting the RBI to rethink on any rate cut this year.

The short-term commercial paper market, too, is witnessing a fall in yields with companies being able to issue CPs at 8.10% compared to 8.45% in mid-May.

Market experts said companies are taking advantage of this fall in rates to lock-in softer yields for their CP issuances.

The call rate — the rate at which banks lend overnight money to each other — stood at 7.41% on Tuesday, while the collateralised borrowing and lending obligation rate — an instrument that uses government securities as collateral — stood at 7.59%.

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