Yields on commercial papers (CP) and certificate of deposits (CD) — short-term borrowing instruments used by companies and banks respectively — have seen a rise of 30 to 50 bps since the start of calendar year 2015.
On Friday, the two-month CP was trading at 9.08% in the secondary market, according to data by Fixed Income Money Markets and Derivatives Association (FIMMDA), compared with 8.52% in early January. The yield on the 3-month CP was at 9.06% compared to 8.7% at the beginning of the year.
Similarly, yields on CDs have risen by 30 bps from the beginning of the calendar year. On Friday, a three-month CD was trading at 8.64% compared to 8.35% at the start of the year while a six-month CD was trading at 8.53% compared to 8.44% in January.
“Due to the heavy redemptions that are seen during this period of the year, companies and banks have to refinance their existing borrowing instruments, which leads to a hardening of yields. Moreover, the market is also witnessing a liquidity shortage due to multiple factors like tax outflows,” said Shashikant Rathi, senior vice-president & head, investments, ALM & capital markets, Axis Bank.
Both CP and CD rates had experienced swings between January and March, with rates touching high levels in mid-February before witnessing some cooling off. Market experts say although there is a rise in yields, the spread with the repo rate has not risen by the same quantum as was seen over the previous years for this period. “Due to advance tax outflows and anticipation of further liquidity crunch due to spectrum auctions, CP and CD rates have seen some rise. As we are crossing into the next financial year, in the next week to 10 days, the rates for the instruments maturing in June are expected to soften,” said Lakshmi Iyer, chief investment officer at Kotak AMC.
One reason why the rates haven’t risen too much is the liquidity provided by RBI through its various repo windows. The RBI has been stepping in to provide additional liquidity whenever a rise in CBLO rates is seen, a leading broker in CDs said.
On Friday, the call rate — at which banks lend money to each other on an overnight basis — eased towards the end of the day to close at 7.25%, while the weighted average rate stood at 7.5%. The collateralised borrowing and lending obligations rate on Friday stood at 7.30%. CBLO is an instrument through which banks and other financial institutions can borrow money using government securities as collateral.