Issuances of certificates of deposit (CD) and commercial paper (CP) rose in May amid tight liquidity conditions in the banking system and diversified borrowing by non-banking finance companies, money market experts said.
“Liquidity in the banking system has been in an extreme deficit in the month of May, which led to higher supply of CP and CDs as compared to last year (May 2023),” said Mataprasad Pandey, vice president at Arete Capital Service.
Banks raised Rs 82,580 crore through CDs in May, an increase of 35.12 percent from Rs 61,115 crore in May 2023, according to Prime Database. Companies raised Rs 1.34 lakh crore in May through CPs compared with Rs 1.18 lakh crore a year earlier, the data showed.
According to Ajay Manglunia, managing director of investment group at JM Financial, CP issuances have remained on the higher side because NBFCs are trying to diversify their funding sources after the Reserve Bank of India increased risk-weight norms on bank credit to them.
“On the demand side, the liquid assets of mutual funds have grown by about 17 percent on-year, which in turn has increased demand for short-term papers,” Manglunia said.
The central bank increased the risk weight of bank credit to NBFCs by 25 percentage points on November 16, 2023. It also increased the risk weight on consumer loans by banks and NBFCs by 25 percentage points.
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Tight liquidity
The liquidity deficit in May prompted banks to raise funds from the market. To tackle this, the central bank conducted 11 variable rate repo auctions, with tenures ranging from overnight to 14 days.
However, liquidity turned positive since the start of June due to government spending on salaries and pensions. Currently, liquidity is estimated to be in surplus of Rs 33,821.99 crore, as per RBI data.
Yield movement
The yield on CPs and CDs increased by 5-109 basis points in May due to the liquidity crunch and heavy demand for funds, experts said. The yield on CPs issued by NBFCs maturing in three months increased to 7.65-7.85 percent on May 31 from 7.55-7.75 percent on May 2.
The yield on papers issued by manufacturing companies increased to 7.30-7.45 percent on May 31 from 7.20-7.40 percent on May 2. The yield on CDs increased to 7.15-7.30 percent.
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