In the wake of a shortage in the money market, interest rates on commercial paper (CPs) and certificate of deposits (CDs), typically short-term instruments, have spurted by around 180-200 basis points over the last one month.
Interestingly, one-month CP and CD paper is costlier than three-month paper, in what dealers say is a temporary aberration in the market. ?Neither banks nor companies want to lock in for more than a month, even if it is cheaper to do so, given the volatility in interest rate movements,? explains a dealer. On Thursday, one-month CDs were quoted at 6.6% while three-month CDs were quoted at 6.25%.
Indeed, larger banks, like State Bank of India, which were looking to borrow for a slightly longer term of six months to a year, haven?t done so yet and are still assessing the situation.
?We were looking to place CDs on Wednesday but the rates were too high, so we decided not to enter the market,? said an SBI official. However, SBI had borrowed money for six months at 5.90% earlier this week. Dealers said that in a bid to tide over the tight liquidity conditions, Uco Bank and Union Bank of India placed CDs on Thursday.
Uco Bank borrowed six-month money for Rs 225 crore at 6.45%, while Union Bank of India picked up three-month for Rs 675 crore at 6.10%.
Sad Joydeep Sen, senior V-P, fixed income, BNP Paribas, ? Short-term rates continue to remain high owing to tight liquidity which is expected to continue for a month.? Meanwhile, mutual funds are seen actively buying paper with shorter maturities. Said Maneesh Dangi, head of fixed income at Birla Sunlife AMC, ?Since coupons are more attractive at the shorter end, it makes sense for us to invest in paper up to six-month maturities.?