Commercial Papers interest rates at 6-year low

By: and |
Mumbai | September 09, 2016 6:07 AM

Interest rates on three-month commercial papers (CPs) for A1+-rated companies are currently at a six-year low of less than 7%, according to data sourced from Bloomberg.


Interest rates on three-month commercial papers (CPs) for A1+-rated companies are currently at a six-year low of less than 7%, according to data sourced from Bloomberg.

The FIMMDA India Commercial Paper rates for the three-month index show ‘A1+’ paper can be issued at 6.96%. In early March, ‘A1+’ CPs were being issued at an interest rate of 9.137%.

The total outstanding of CPs stood at Rs 3.86 lakh crore as on August 15. In early March, it was Rs 2.60 lakh crore. In the first four months of the current financial year, corporates had raised Rs 6.78 lakh crore through CPs — over 33% more than the amount raised during the same period of 2015.


The availability of cheaper funds in the money markets has seen companies staying away from banks. Banks, for their part, have had little option but to lend via CPs. Their investment in CPs, as a share of their advances to industry, jumped 118 bps (Y-o-Y) for the fortnight ended July 22. The lowest three-month marginal cost of funds-based lending rate (MCLR) offered by any bank is 9%.

The lukewarm demand for fresh loans, especially project finance, has left banks with few opportunities to lend to the corporate sector. Most banks are driving the loan book by pushing retail loans. Large PSBs such as Punjab National Bank, Bank of India, Canara Bank and IDBI Bank concede that companies are not keen on borrowing at high rates from them. As such, banks have been investing in corporate bonds and CPs.

Investments in CPs, however, have driven down yields even as outstanding bank credit to the industry rose a mere 0.5% in Q1FY17. The trend isn’t likely to reverse any time soon, say bankers and money market players.

R Sivakumar, head (fixed income) at Axis Mutual Fund, observes that bank lending rates haven’t come down by even a fraction of the fall in money market rates. “So, I think this trend is likely to stay, especially given the increased liquidity in the market.”

Lakshmi Iyer, CIO (debt) at Kotak Mahindra Asset Management Company, points out that liquidity in the market is quite comfortable currently. “Also, the MCLR or base rate is priced much higher than CPs or corporate bonds. So, it is safe to assume that this trend is here to stay.”

Meanwhile, with limited avenues to deploy funds, fresh issuances of certificates of deposits (CDs) have fallen. Sivakumar believes that smaller investments by mutual funds into CDs have also driven money to the CP market.

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