Rates on the three-year commercial paper (CP) touched a new one-year high of 7.60% on Friday, as corporates rated below ?AA? continued to borrow via this route rather than through loans linked to the benchmark prime lending rate (BPLR).

Aircel, for instance, which has a rating of PR1 from CARE, forked out 10.25% for Rs 68 crore, which it needs to repay in 240 days. Several non-banking finance companies (NBFCs) including Tata Capital, Reliance Capital, Religare Finvest, L&T Finance, Cholamandalam Investment & Finance and HDFC were in the market and picked up about Rs 5 crore each at 6.75-8.50%.

Meanwhile, yield on the 10-year benchmark government paper inched up 3 basis points to 7.97%, above Wednesday?s close of 7.94%. Dealers believe that with inflation still high, just under 10%, the central bank could increase policy rates in September. Banks borrowed Rs 11,015 crore from RBI?s repo window on Friday even as they picked up gilts worth Rs 12,000 crore auctioned by the central bank.

Ashish Parthasarthy, treasury head, HDFC Bank said that government borrowings aren?t coming down and so there?s no demand for government paper given that most banks have more than adequate paper to meet their statutory liquidity ratio (SLR) requirements.

?Yields are likely to find support at close to 8%,? he added.

Banks too borrowed heavily in the money market. Volumes in the certificates of deposits (CD) market crossed Rs 6,900 crore on Friday, whereas they had averaged just Rs 1,000 crore a day last week. Canara Bank alone mopped up about Rs 800 crore (compared to Rs 1,100 crore on Wednesday) across tenures forking out 6.7-7.5%. Yields on three-month CDs have moved up 20-25 basis points compared to last week.

The rise has been higher for CPs, where rates have risen by about 50 basis points in seven days. In fact, short-term borrowing costs for companies have gone up by about 200-250 basis points in the last two months. Says a treasurer at a public sector bank: ?NBFCs are taking the CP route and borrowing from mutual funds, since it?s costlier to borrow from banks who are charging more.?

Several mutual funds are investing in CPs, which will be part of their portfolios for fixed maturity plans (FMPs).

With more companies opting for the CP route, it?s possible, say market observers, that the Reserve Bank of India (RBI) might prescribe a higher minimum net worth norm for companies to become eligible to raise short-term money through CPs. At present, companies with a net worth of Rs 4 crore are eligible to raise such funds.

Says Hitendra Dave, head, global markets, HSBC: ?With liquidity getting tight, companies are coming forward to raise CPs at higher rates. We expect the money in the system to get even tighter by mid-September, on account of advance tax outflows, though right now, liquidity is balanced.?