Yields on short-term commercial papers (CPs) and certificate of deposits (CDs) — instruments used by companies and banks to borrow short-term money — have risen by at least 24 bps from the beginning of this fiscal year, according to data by the Fixed Income Money Market and Derivatives Association of India (FIMMDA).
The yield on the two-month commercial paper was at 8.54% on Tuesday, up 43 bps since the beginning of this fiscal, according to FIMMDA. The three-month commercial paper was trading at a yield of 8.61%, which is 24 bps above the levels seen during the first week of April.
Market experts attribute this surge in yields to the lack of liquidity in the system. “Usually in March, we see liquidity getting tighter whereas the situation eases a bit in April. This time around, we haven’t seen the condition improve,” said the fixed-income head of a mutual fund house.
One prominent reason that has led to the liquidity crunch is the lack of government spending in April. Many market participants say the spending has not happened to the tune of what is usually seen in the month of April.
As on May 6, the government surplus cash balance was at R71,833 crore, according to the Reserve Bank of India data.
Mutual fund houses are the biggest investors in the CP and CD market. Some experts also believe the dampening of rate cut expectations might have led to a surge in yields.
“MF houses were expecting one more rate cut in the near future, but due to rising oil prices and falling rupee, any possibility of a rate reduction in the near future has been dampened,” said Ashish Jalan, assistant vice-president, SPA Securities.
One bond arranger, on condition of anonymity, said many mutual fund houses had taken positions in these short-term instruments as they expected much more inflows in April and the rates to soften in the near term.
However, with inflows not matching their expectations and the possibility of any softening in the rates getting diminished, fund houses had to offload the positions that led to a rise in the yields, he said. One broker said the
primary market deals were reflecting this rise in yields in the pricing. Even the short-term CDs have seen a surge in yields.
According to FIMMDA data, the three-month CD was trading at 8.26%, which is 31 bps higher than the early April levels. “We had seen some sort of selloff in CDs over the last week,” said a broker who deals in these instruments.
On Wednesday, the call rate — the rate at which banks lend overnight money to each other — stood at 7.33%, while the collateralised borrowing and lending obligation rate — a money market instrument that uses government securities as collateral — stood at 7.30%.