With many IPOs lined up over the next two to three weeks, commercial paper yields of non-banking finance companies have risen between 5 and 15 basis points.
With many initial public offerings (IPOs) lined up over the next two to three weeks, commercial paper (CP) yields of non-banking finance companies (NBFCs) have risen between 5 and 15 basis points. Bloomberg data show that Axis Finance issued a three-month CP at 6.43% on August 11 where as on September 5 the firm issued a CP of similar tenure at 6.58%.
Same goes the story for Aditya Birla Finance which had issued a three-month CP at 6.54% on August 24 while on September 6, its similar tenure CP was priced at 6.60%. Murthy Nagarajan, head of fixed income at Tata Mutual Fund confirms the point that yields are on the rise due to the upcoming IPOs.
Matrimony.com and ICICI Lombard’s IPOs are set to hit the market next week which are likely to attract considerable interest from investors. “NBFCs borrow higher amounts due to heavy IPO funding requirement of clients. As a result, we could see the yields go higher,” Nagarajan points out. This short-term crunch in liquidity coupled with the fact that mutual funds have investment limits in NBFC papers to the tune of 25% of their assets under management (AUM) might lead to some sort of hardening in NBFC CP yields. It is noteworthy that mutual funds are the biggest players in CP market.Ajay Manglunia, EVP at Edelweiss Securities asserts the market will be keenly watching the CPI inflation data next week for further cues on monetary policy guidance.
“Lower than expected GDP growth had pushed yields down last week but geo political tensions have shaken that again. Market will look sideways in the next couple of weeks before further softening from here,” Manglunia observed.
If the CPI falls, rate cut expectations might gather momentum leading to a fall in yields. Although the CP market is considerably active, the certificate of deposits (CDs) market has remained sluggish since demonetisation. CDs are money market instruments through which banks borrow short-term funds. Lenders are hardly issuing CDs as credit growth remains low and liquidity remains abundant. As a result, the outstanding CDs in the system remain at a decade low. Reserve Bank of India (RBI) data shows that on July 7, the CD outstanding stood at R1.1 lakh crore which is the lowest since August 2007.