Commercial paper rates fall below 9% on investor interest

Commercial paper rates fall below 9% on investor interest

Last Updated: Fri, Aug 17, 2012 04:15 hrs

The rates on commercial paper (CP) fell below nine per cent after about one-and-a-half years, as investors took advantage of interest differentials with other debt instruments such as certificates of deposit (CDs).

Companies other than non-banking finance ones, the usual issuers, were seen taking advantage of the investor demand.

CP is a short-term debt instrument issued by companies to raise funds for up to a year. CDs are issued by banks for the same maturity.

Mutual funds, banks and insurance companies are major investors in these instruments.

According to market participants, Tata Motors raised Rs 100 crore at 8.8 per cent for three months, Marico issued November-dated CP at 8.8 per cent and IOC raised Rs 500 crore at 8.77 per cent for maturity up to November.

CP rates had shot up to 12 per cent in March and have since been on a declining trend.

However, a sharper fall in CD rates recently have led to shift in investor interest from CDs to CP. “There was demand for CDs when they were being issued at nine to 10 per cent. Then, CP were not preferred much,” said K P Jeevan, head-fixed income at Karvy Stock Broking.

Rates on CDs have fallen 50 basis points over the past month, due to lack of issuances from banks.

A recent advisory from the finance ministry asked public sector banks to limit their bulk deposits to 15 per cent of total deposits. Also, banks realigned the rates on CDs to their card rates, to minimise the interest rate differential.

“Banks that are not borrowing but have surplus funds are also investing in CP,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

Companies are preferring to raise funds via CP over bank loans, as rates in the money market are lower than most banks’ base rates, he said. “The amount of CP issuances have gone up with softening of rates.”

Bank investment in CP rose to Rs 21,550 crore as on July 27, from Rs 13,350 crore a year before, according to data from the Reserve Bank of India.

State Bank of India Chairman Pratip Chaudhuri recently said the bank’s credit growth expectation included investments in CP. The central bank is looking at including the amount raised via CP to calculate credit growth in the economy, he added.

Rates are expected to stay around these levels for another month before advance tax outflows create liquidity pressure in mid-September.

Presently, the liquidity deficit in the banking system is well within the central bank’s comfort zone, of one per cent of net demand and time liabilities.

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