Are policy makers under the US spell?

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rules.

For example, till recently, when fresh IPOs hit the market almost every other day, corporates— especially non-banking finance companies engaged in the business of providing margin-funding to companies and high net worth individuals applicants (of equity IPOs)— have been big borrowers through the commercial paper (CP) route.

These NBFCs had another tie-up with mutual funds that lent them money at rates which are as high as 10%. Three-month borrowing rates of triple `A’ corporates rose from 7.5-7.6% level during the first week of October, 2007 to 8.75-9.4% around the fortnight beginning mid-December, the market witness a sudden jump of 180 basis points.

Since the beginning of the year 2007 till December last, the money raised in CPs, of varying maturities and up to a maximum tenor of one year, stood at Rs 9,325 crore.

The entire cycle was a watertight, back-to-back arrangement between corporates, high net worth individuals applying for IPOs, their financiers, the non-banking finance companies (NBFCs) and the lending organisations namely, mutual funds. This arrangement also explains the rate inconsistencies of identical rated issues raised in or around the same period. The rate differential, as can be seen in the month of December 2007 was as wide as 80 to 100 basis points for two similar triple A rated papers.

The returns for IPO applicants ranged between 25% and 30% on listing, hence it was worthwhile to tap the CP market for additional resources that had ready-made takers (lenders) like mutual funds who earned interest rates as high as 10%.

This should explain why primary equity issues that hit the market last year, got oversubscribed many times the issue size. Between November 2007 and December 2007 the IPO raised was around Rs 8,000 crore to Rs 10,000 crore.

Now, the worry for bankers is that of liquidity tightness and some move is expected from the RBI towards the policy rates. Bank credit has already started showing signs of a pick up. This could entail a 25 to 50 bps reduction in bank cash reserve ratio from the present level of 7.5%. Besides, the RBI would need to move towards ensuring the interest rate differential between the US and India remains stable at the pre-Fed cut level, if not narrower.