Companies and banks have begun to feel the pinch of tight money conditions, primarily due to the stringent policy adopted by the Reserve Bank of India (RBI) and the slew of primary equity issues that have put additional strain on liquidity conditions.
As a result, near-term market borrowing rates of corporates as well as banks have shot up by 150-180 basis points since the beginning of October. Three-month borrowings of triple ?A? corporates have risen from 7.5-7.6% in the first week of October to 9.3-9.4% as of Thursday?a spurt of 180 basis points? while bank borrowings through certificates of deposit (CDs) in the same period rose from 7.03-7.04% to 8.4-8.5%, or 137-156 bps.
Corporates have been big borrowers in commercial paper, especially non-banking finance companies (NBFCs) that are primarily engaged in providing margin funding to companies and high net-worth individuals (HNIs) applying for equity IPOs. In the last two months, IPOs are estimated to have been worth Rs 8,000-10,000 crore, analysts say.
?The returns for such HNIs and corporates from such IPOs ranged between 25% and 30%, hence it was worthwhile for such IPO funding NBFCs to tap the commercial paper market that had ready-made lenders like mutual funds. The entire arrangement is back-to-back–the partnership with corporates applying for IPOs, the funding NBFCs and the lending mutual funds. It?s a win-win for all,?? said a senior analyst at a foreign institutional investor.
According to bank analysts, near-term or overnight rates shot to the upper end of the 6-7.75% prescribed corridor after the RBI, in its October 29 policy, hiked banks? cash reserves to 7.5% from 7%.
The move usurped Rs 16,000 crore in cash from the system, thereby impacting near-term rates of up to three months. In addition, banks were also rolling over maturing CDs and simultaneously shoring up additional funds to increase the size of balance sheets ahead of the fiscal end, said a senior government banker.
