Market experts say yields have risen due to the requirement of short-term funds by NBFCs and brokerages, which are issuing CPs for IPO financing
After staying steady in the initial part of April, yields on commercial paper (CP) and certificates of deposit (CD) — short-term instruments used by companies and banks, respectively, to borrow — have risen by at least 10 basis points.
The two-month CP rate, according to data from the Fixed Income Money Market and Derivatives Association of India (FIMMDA), stood at 8.23% on April 16, a 12 bps rise from 8.11% during the initial part of the month.
Yields on the three-month CP also rose 10 bps to 8.48% on April 16 compared to 8.38% on April 6. The three-month certificate of deposit rate has risen to 8.18% compared to 7.94% in early April.
Market experts say yields have risen due to the requirement of short-term funds by non-banking finance corporations (NBFCs) and brokerages which are issuing CPs for initial public offering (IPO) financing.
“The rates have surged because the supply of CPs have risen due to fund requirements of a lot of brokerages and NBFCs for IPO financing. This is a temporary phenomenon,” said Ashutosh Khajuria, president-treasury and network head at Federal Bank.
“Companies have raised an estimated R10,000-12,000 crore from the market for the IPO financing,” a bond arranger said.
However, MF houses say the IPO financing requirement may be one of the reason for the surge in rates, but not a prominent one. Fund managers said with all the funds available at the beginning of the month getting fully invested, any further issue will put pressure on the yields due to shortage of liquidity.
“Typically, we see a lot of inflows into the liquid funds at the beginning of April because of which the rates had softened. Short-term rates have stabilised now and we may see the yields continuing at the current levels, at least for some time, or till there is some kind of optimism of a rate cut by the RBI,” the fixed-income head of a mutual fund house said.
Experts also believe a lack of government spending has contributed to a crunch in liquidity. “The government spending in April was not in line with what was expected, which has led to a shortage of liquidity in the system. This might be one of the reasons that is putting pressure on short-term rates,” Murthy Nagarajan, head-fixed income at Quantum MF said.
The call money rate — the rate at which banks lend overnight money to each other — ended at 7.41% while the collateralised borrowing and lending obligation rate, a borrowing instrument that uses government securities as collateral, stood at 7.19% for Friday.