After grappling with a sharp rise in funding costs since mid-July, corporates and banks are now finding it easier to raise funds in the wholesale market, with commercial paper (CP) and certificate of deposit (CD) rates holding near three-month lows.
CDs are instruments used by banks to raise wholesale funds, while CPs are used by corporates to meet short-term capital requirements. After hitting a high of 11% in July and August, three-month CD rates are currently hovering around the 9%-mark ? in line with RBI’s marginal standing facility (MSF) rate.
“With the RBI having cut its MSF rates to 9% from 10.25%, the liquidity condition has definitely eased, which has also led to easing of rates and the credit cost,” said Shubhalaxmi Panse, chairperson and managing director, Allahabad Bank.
Three-month CP rates have also seen an equally significant fall with rates coming down from above 12% to near 9.3%. The drop in rates has also led to surge in the amount of funds raised through the CP market. According to data collected by Prime Database, till October 21, the amount raised through this route stood at nearly R26,082 crore. This is 45% higher than September.
Over the last one month, RBI partially reversed some of its liquidity control measures, which it had introduced on July 15. RBI also allowed banks to maintain 95% cash reserve ratio (CRR) on a daily basis, instead of the earlier requirement of 99%. This helped ease liquidity conditions.
However, bank borrowings from RBI’s liquidity adjustment facility (LAF) are still capped at 0.5% of each bank’s net demand and time liabilites (NDTL), making it difficult for banks to access more funds at the repo rate of 7.5%.
“We had seen about 10-15-bps sequential reduction in our cost of funds when rates had started to cool off in September. But I feel the full impact of this will come in the October-December quarter when we see the cost of funding going down further,” said SK Jain, CMD, Syndicate Bank.
RBI had first introduced these measures to curb the steep fall in the value of the rupee against the dollar. In recent communications, RBI has indicated that policy will be ?normalised? gradually as the Rupee stabalises.
While the revival of the wholesale funding markets comes as relief to banks and corporates, it may also lead to shift in demand for short term credit back away from banks.
Easy funding
* After hitting a high of 11% in July and August, three-month CD rates are currently hovering around the 9%-mark
* Three-month CP rates have also seen an equally significant fall with rates coming down from above 12% to near 9.3%