By Manish M Suvarna
A majority of commercial paper (CP) redemptions between January and March 2022 are likely to be rolled over, as issuers are expected to lock in lower rates before rise in yields as the Reserve Bank of India (RBI) normalises liquidity by withdrawing the surplus from the banking system.
According to the data compiled from market sources, CPs worth Rs 2.41 lakh crore are up for redemption in January-March, of which February has the highest maturities pending at Rs 90,760 crore, followed by Rs 83,296.65 crore in March. Reliance Retail Ventures, Reliance Jio Infocomm, National Bank for Agriculture and Rural Development, Reliance Industries and Tata Steel have heavy maturities pending in the January-March period.
“We believe that a major part of the redemptions in January-March 2022 will be rolled over. The rolling over of CPs or money market instruments depend on a lot of factors and not just interest rates,” said Puneet Pal, head – fixed income, PGIM Mutual Fund.
The RBI has been withdrawing surplus liquidity from the banking system, which has pushed up short-term rates higher. They are expected to inch up further in tighter liquidity conditions and hence issuers are expected to roll over their papers due to mature in this fiscal to avoid paying higher rates. The rates on papers issued by manufacturing companies were trading in the range of 3.82-4.08% and those on non-banking finance companies were trading between 4.15-4.40%.
Currently, the surplus liquidity in the banking system is estimated to be around `5.36 lakh crore, which has almost narrowed in the past few days. “CPs are normally issued for meeting short-term requirements by corporates, such as working capital financing, and hence, there is the likelihood of these papers getting rolled over,” said Marzban Irani, CIO – fixed income, LIC Mutual Fund Asset Management.
However, some market participants expect issuers to redeem their papers as mutual funds face redemption pressure at the year-end and pull back their investments. Mutual funds are larger buyers of CPs through funds received from liquid funds and money market schemes.
Meanwhile, issuances of CPs are also expected to rise as the economy has started to operate close to normal levels and as working capital requirements go up. An increase in credit offtake will also lead to an uptick in issuances. “The latest credit growth data also points to increase in credit offtake, which will lead to increase in borrowings from the capital markets,” Pal said.