Interest rates on commercial paper (CP), short-term securities issued by companies to raise funds, are expected to remain high due to liquidity swings due to tax outflows and increased spending during the festive season.
“India Ratings expects banking system liquidity to become volatile in the near term due to quarterly tax outflows and monthly GST outflows and subsequent festive season. The exit from the incremental cash reserve ratio (ICRR) will lead during the festive season Liquidity flows in the banking system, which will benefit money markets.”
After rising by about 25 basis points in the first half, the CP rate stabilized at a higher level in the second half of August following the announcement of the I-CRR. The 45-90 day short-term issuance CP interest rate increased by 18 basis points compared with July.
Nonetheless, total issuance increased in August, both in terms of value and number of issuers, driven primarily by demand for greater balance sheet liquidity. Looking ahead, commercial paper issuance by financial entities is expected to gain further traction in the coming quarters, driven by continued healthy growth in payments, the report said.
The Reserve Bank of India launched I-CRR on August 10 to absorb excess liquidity in the system arising from the return of Rs 2,000 notes to the banking system. Last week, the Reserve Bank of India proposed a phased reduction in I-CRR to ensure banks have sufficient funds to meet increased credit demand during the festive season.
The central bank released 25% of bank funds on September 9 and will release another 25% on September 23 and the remaining 50% on October 7.
CP worth Rs 1.4 billion will mature in September, followed by Rs 551 billion in October and Rs 861 billion in November. The total amount of upcoming CPs is 211 issuers, of which the top 10 issuers account for Rs 1.3 billion or 45% of the total amount.
CPs issued by NBFCs accounted for 41% of CPs with a maturity amount of Rs 120 crore, followed by corporates at 34% or Rs 93,900 crore. The CP of public financial entities accounted for 23%, amounting to 634 billion rupees; the CP of public entities accounted for 3%, amounting to 77 billion rupees.