With liquidity tightening, the rates for commercial papers (CPs) and certificate of deposits (CDs) have gone up.
Several public sector banks, including Dena bank, Uco Bank and Central Bank of India, have sought ratings for raising resources through CDs.
Accordingly, rates on short term debt papers in the secondary market rose by around 20 basis points on Tuesday because mutual funds sold papers on redemption pressures, dealers said.
DR Dogra, managing director & CEO, Care, told FE, ?Naturally, at a time when credit expansion is taking place, banks have to organise all avenues to mobilise their resources in addition to mobilising deposits from public.Banks are issuing lower tier-II and upper tier-II bonds as well as CDs.??
Kartik Srinivasan, senior vice president & co-head, financial sector rating, Icra, said there has been some requirement for enhancement of CDs and also for tier-II bonds in recent past from banks to meet their credit demands and to maintain their capital adequacy norms in that perspective. ?We expect more banks to opt for rating of CDs and tier-II bonds as well in near future,? he said.
Mutual funds have been major sellers on Tuesday as they are facing redemption and are preferring to hold on to cash right now on fears of further redemptions next week for payments towards corporate advance tax,” said a dealer with a mutual fund firm.
Around Rs 30,000 crore will move out of the banking system by June 15 towards the first instalment of corporate advance tax. Telecommunications companies paid the government Rs 67,700 crore for 3G spectrum Monday.
“Banks are buying these papers to avail of the higher rates. Papers having a tenure of two weeks are trading at 6.75-7.00 levels,” said a dealer with a state-owned bank.
Today, June maturity papers were dealt up to 7% as against 6.70% on Monday. Banks are buying shorter-tenure papers in the secondary market at higher rates on expectation rates would fall in July as liquidity will come back into the system.
“Investors are buying papers at higher rates in the view to sell them at a higher price in July,” said a dealer with a mutual fund company. Rates on three-month papers have risen 180-200 basis points since a month.
Issuances in the primary market fell because banks were buying papers in the secondary market due to the rise in rates, dealers said.
?Mutual funds are on the selling side now and so are not keen on investing in primary issuances,” said another dealer. On Tuesday, only State Bank of Mysore placed Rs50 crore one-year CDs at 6.55%.
Liquidity in the system was also tight as was seen by the overnight call rate rising above the repo rate and touching 5.40% intraday. Three-month CDs were quoted at 5.80-6.00%, as against 5.70-5.90% on Monday, while three-month commercial papers were quoted at 6.10-6.30%, compared with 5.90-6.10% Monday