Commercial paper rates may affect growth: India Inc

High rates of commercial papers can affect manufacturing and infrastructure sectors, fears India Inc after the rate on the three-month commercial paper issued by companies rose to 7.85%, the highest level since November 2018.
 
Raising short-term capital will become expensive for companies via commercial papers (CP) and sectors which are going to get impacted are raising the call for the Reserve Bank of India (RBI) to infuse liquidity into the system.
 
Speaking to FE, R Shankar Raman, wholetime director and chief financial officer, Larsen & Toubro, said, “The elevated global inflation leading to sharp hike in the US interest rates has led to the outflow of USD.”

“The RBI’s response in supplying USD to the markets have resulted in the decline in systemic liquidity. The high CP rates, if unchecked, will affect the manufacturing and infrastructure sectors,” he added.

 CPs are primarily instruments of short-term unsecured borrowings of corporates. Since the money is borrowed to tie over purely short-term liquidity crunch the rates are likely to go up with higher volatility depending on the overall demand and supply of funds in the market.
 
Niranjan Hiranandani, managing director, Hiranandani Group, said, “If commercial paper rates move above 8%, it will definitely have a negative effect on demand and GDP growth. It may even cause an increase in inflation because it is also a cost.”

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Retail inflation cooled off slightly following moderation in the consumer price index last month but it stayed above the RBI’s target. Companies have been readily passing on rising costs to the end customers, though consumptions and savings may be taking a hit in the bottom of the pyramid, say experts.
 
Jyoti Prakash Gadia, managing director at investment banking firm, Resurgent India, said, “For meeting the immediate financial year ending requirements like advance tax payments and other short-term requirements, the demand for funds has gone up and the underlying interest rate rising cycle in the last 11 months is also responsible for the spurt in corporate CP interest rates.
 
Nitan Chhatwal, founder, Shrem InvIT, said, “Hardening of short-term rates will create stress on working capital management particularly the businesses which need significant working capital finance.” The RBI last September allowed REIT and InvIT to issue CPs.
 
Companies are seeking RBI’s intervention for infusing liquidity back into the system. The central bank has hiked the repo rate by 250 basis points since May 2022 to bring it to the highest level in four years.
 
“The spurt in interest rates is a new variable for the corporates to deal with in addition to the elevated commodity prices and labour cost. Time is ripe for the RBI to infuse liquidity into the system through reduction in CRR or through OMOs. These steps could protect the growth environment while RBI deals with inflation containment measures,” Raman added.
 
With inputs from Rajesh Kurup in Mumbai