With banks raising their lending rates following the hike in key rates by the central bank, corporates are increasingly tapping the relatively cheaper commercial paper (CP) market. Volumes in the CP market surged to over Rs 2,000 crore on Wednesday compared with the daily average of Rs 250 crore last week while yields continued to rule at their highest levels in a year, reveals FIMMDA data.

CPs of companies that do not command an AAA rating are now available to buyers at yields of over 7.5%, over 50-60 basis points higher than they were a couple of weeks back. Says Hemant Mishr, who runs the treasury at Standard Chartered Bank, ?Lenders, including banks and mutual funds, prefer to lend for shorter tenures right now, rather than locking in longer-term bonds since interest rates are moving up. Spreads in the three- to five-year bucket for corporate bonds have contracted to around 70 bps, so it?s not worth the risk.?

Yields on three-month CPs, which are averaging 6% for AAA corporates, are about 150 basis points below the base rates of banks. Both SBI and ICICI Bank have a base rate at 7.5% while HDFC Bank?s base rate is 7.25%.

Borrowing via the benchmark prime lending rate (BPLR) route is now more expensive since several banks have upped their BPLRs over the past fortnight by anywhere between 50 and 75 basis points. ICICI Bank?s BPLR is now 16.25% while that of Bank of Baroda (BoB) is 12.5%. Clearly bankers want customers to stay away.

Companies are loading up even for short periods. Among the bigger corporates looking for money on Wednesday was Reliance Industries, which picked up 15-day money for up to Rs 520 crore at 6.20%. Says Hitendra Dave, head, global markets, HSBC, ?It was always expected that companies would move to the CP market once the base rate system was introduced. Till mid-May, liquidity was comfortable. But now there?s just about enough money in the system. That?s why short-term borrowing costs for companies have gone up by about 200-250 basis points.?

Meanwhile, the yield on the 10-year benchmark gilt nudged the 8%-mark to close at a three-month high of 7.94%. Says Ashish Parthasarthy, treasury head, HDFC Bank, ?The government?s borrowing programme is not really coming down. So there?s no demand for government paper, given that most banks have more than adequate paper to meet the statutory liquidity ratios(SLR). So yields are likely to find support at close to 8%.?

It wasn?t just companies who were in the market for money; banks, too, appeared to be borrowing. Volumes in the certificates of deposits (CD) market crossed Rs 6,700 crore compared to last week?s average of Rs 1,000 crore. Canara Bank alone mopped up about Rs 1,100 crore across tenures forking out anywhere between 6.7% and 7.5%. Yields on CDs have moved up by about 20 basis points since last week. Axis Bank picked up a little over Rs 1,000 crore, paying 6.6% for money that it needs to return in about five months. On Tuesday, yields on three-months CPs crossed one-year highs. ?CP rates are trading at new highs because companies are using this route to borrow for short terms,? said the bank said. Companies borrowing for a longer period, of about a year, had to fork out 8.25-8.5%, compared to just below 8% a fortnight back. Public sectors firms, however, are able to convince lenders to loan them money at much lower rates; steel major SAIL managed to borrow just over Rs 300 crore for 34 days at a yield of 4.7%.