High CP rates are not good news for companies as it raises the cost of short-term funds for them.
Rates on commercial papers (CPs) with short-term maturity have risen sharply in the past two months as the Reserve Bank of India (RBI) has tightened the leash on liquidity. CP rates with maturity of two-three months have surged nearly 40 basis points since August, hitting non-banking financial companies (NBFCs) the most.
High CP rates are not good news for companies as it raises the cost of short-term funds for them. CP is a debt instrument issued by companies to meet their short-term financing requirements from the money market.
“Banks have become selective in giving short-term loans to companies due to liquidity tightening. Number of banks started facing liquidity issues after the RBI imposed ICRR to address the issue of excess liquidity,” Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap, a debt advisory firm, told FE. “Supply of CPs have also increased in the recent months which has also contributed to the hardening of rates,” he added.
As per the National Securities Depository Limited (NSDL) data, companies raised Rs 91,764 crore through 381 CP issuances in July while in September, they raised `1.21 trillion in September, indicating a high supply of these papers.
NBFCs have been hit the hardest by the surge in rates as they have to raise funds now at around 7.40-7.55% against 7.03-7.15% at the start of August.
RBI’s decision to impose ICRR has played a crucial role in sucking excess liquidity. RBI governor Shaktikanta Das on August 10 announced that banks would be required to maintain ICRR of 10% on the increase in their deposits between May 19 and July 28, to absorb surplus liquidity of `1 trillion from the banking system. Apart from imposing ICRR, the RBI has been conducting variable rate reverse repo (VRRR) auctions to drain excess liquidity.
“Rates on CPs are expected to remain elevated in the near term because the RBI has made it very clear that it will continue to suck out excess liquidity from the banking system,” Vijay Singh Gour, lead analyst – BFSI Research, Care Ratings, told FE.
Source:financalexpress.com