Issuances of commercial papers (CPs) are expected to fall in coming months as liquidity squeeze will push up yields on CPs by another 50 basis points, according to treasurers and fund managers.
?At this point of time, it does not look as if liquidity is going to ease. It will take at least a couple of months for liquidity to become comfortable. This would see the yields moving up by at least 50 basis points,? said Ajay Manglunia, senior vice-president, debt market, Edelwiess Securities.
On Wednesday, yields on six-month commercial papers stood at 7.60%, unchanged from Tuesday?s close. Yields on the one-year CP rose to 7.95% on Wednesday from 7.90% on Tuesday.
Issuances have already been falling with new CP issues dropping to Rs 7,135 crore in July from Rs 11,885 crore in May.
System liquidity is expected to tighten further as around Rs 54,600 crore gets drained due to a slew of gilt and T-bill auctions.
The Reserve Bank of India will auction Rs 49,000 crore worth gilts and Rs 5,600 crore worth T-bill in the remaining part of this month.
At the same time, around Rs 33,160 crore will enter the market because of redemption of state loans and T-bills including interest payment of state and government loans.
“People were expecting government spending to pick up but that has not happened, putting pressure on liquidity,? said a dealer at HSBC Bank.
With government spending not picking up and auctions draining funds from the system, banks have once again started to borrow from RBI?s repo tender in the last three trading session.
Banks borrowed Rs 16,530 crore from RBI?s repo window on Wednesday compared with Rs 2,500 crore on Tuesday, indicating that tightness is slowly creeping back into the system.
During August 3-6, banks had not borrowed from RBI?s repo window because of slight ease in liquidity arising out of gilt redemption late last month.