Borrowing rates for companies in the money market are on the rise with commercial paper (CP) rates now hovering close to the lowest base rates of banks. CP is a short-term instrument that allows companies to borrow for two to three months.
Moreover, borrowers such as HDFC — the housing finance player — are paying more for bonds with maturities of around three years. Bloomberg data shows HDFC issued short-term bonds at 8.45% in early January for a similar tenure whereas it is now in the market to raise money at 8.70%.
Bloomberg data shows that a company in the Piramal Group has raised three-month money at 9.10% while Tata Capital has issued three-month paper at 9% on February 17. According to Ashutosh Khajuria, executive director at Federal Bank, short-term CP rates are up around 40-50 basis points over the last two to three months. There is typically a shortage of liquidity in March when advance taxes are paid. However, this time with the Securities and Exchange Board of India capping exposure by mutual funds to companies and sectors, the tightness in the money markets is more accentuated.
The lowest base rate in the banking system currently is 9.30%. Although banks lend working capital loans at a spread over the base rate, the differential between money market and loan rates have come down considerably.
This is because post the 125 basis points repo rate cut in 2015, banks have successfully transmitted close to 70 basis points of this reduction through multiple base rate cuts. In contrast to this, money market rates and bond yields, after some knee-jerk reaction, rose back to higher levels owing to liquidity crunch and oversupply issues.
Although the differential between the base rate and the CP yields have come down, it is important to note that banks most often lend money at a spread to the base rate. This makes the CP rates still more reasonable than the bank lending rates. Siddharth Chaudhary, fund manager at Sundaram Mutual Fund points out that a three-month CP of a top-rated non banking financial company is trading at over 9%.
Market participants point out that the rise in yields during fiscal year-end are not unusual and is seen every year. However, this time around, the rise in rates appears to have set in sooner.
“Post the SEBI guidelines bringing limitations to mutual funds’ exposure to single issuer and sectoral exposure, money market rates and spreads on NBFCs have gone up a bit. Moreover, there is a general liquidity crunch in the system,” Chaudhary added.
Yields in the bond markets are also facing pressure with the ten-year benchmark bond yield hovering around 7.74%. The ten-year public sector unit (PSU) corporate bond yield is now trending close to 8.57% according to market participants.