Surplus liquidity, firm demand of MF drive down yields on CPs

September 08, 2021 3:00 AM

As of September 7, yields on CPs issued by non-banking finance companies (NBFC) maturing in three months were hovering between 3.50% and 3.65%, and those on papers issued by manufacturing companies were trading between 3.35% and 3.50%.

Post Devolution Revenue Deficit Grant is provided to the states under Article 275 of the Constitution.Post Devolution Revenue Deficit Grant is provided to the states under Article 275 of the Constitution.

By Manish M. Suvarna

The yields on commercial papers (CP) maturing in three months have eased nearly 10 basis points in the last few weeks owing to huge surplus liquidity in the banking system and improved demand from mutual funds. Similarly, yields on the 91-day T-bill also moderated 10 basis points in August.

As of September 7, yields on CPs issued by non-banking finance companies (NBFC) maturing in three months were hovering between 3.50% and 3.65%, and those on papers issued by manufacturing companies were trading between 3.35% and 3.50%. This is lower than 3.65-70% and 3.40-55% yields traded on papers issued by NBFC and manufacturing companies, respectively, in mid-August. The 91-day T-bill cut-off was at 3.3892% on August 11 and 3.2856% on September 1.

RBI’s bond and foreign exchange purchases continue to add to the unprecedented level of liquidity surplus, which has increased from about Rs 7 trillion at start of the fiscal to over Rs 11 trillion now. This is exerting downward pressure on the money market and short-end bond yields,” said Pankaj Pathak, fund manager for fixed income at Quantum Asset Management.

The liquidity in the banking system has remained in surplus in the past few weeks despite the central bank conducting variable rate reverse repo (VRRR) auctions. This is because the inflows from G-SAP auctions, government spending, redemption, coupons and CIC paybacks have offset the outflows from GST and VRRR auctions.

Currently, the liquidity in the banking system is estimated to be in a surplus of around Rs 8.79 lakh crore.
In August, the Reserve Bank of India (RBI) injected liquidity worth Rs 50,000 crore through the purchase of government securities under the Government Securities Acquisition Programme, however, Rs 5.50 lakh crore has been withdrawn via VRRR.

Market participants expect that the liquidity in the system is expected to remain range-bound this week due to almost the same amount of inflows and outflows. Kotak Mahindra Bank report showed that the inflows of `99,840 crore is expected this week and Rs 1.06 lakh crore outflows can be seen.

Additionally, the demand from fund houses has improved substantially since June due to inflows into shorter end funds such as duration fund, ultra-short-term fund, liquid fund, etc. Mutual funds are larger buyers of short-term debt papers such as commercial papers and certificates of deposit.

Demand from fund houses also increased because the investment made by them in CPs have matured in the past few days.

Dealers with brokerage firm said that if such high liquidity persists in the system then yields on CPs are expected to moderate further. “It would be extremely difficult for the RBI to suck out this excess liquidity on a durable basis without hurting the bond market sentiment. T-Bill and money market rates may remain suppressed in the near term,” Pathak said.

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