CP, CD rates may jump 5-10 bps by March-end as liquidity tightens: Experts

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An expected tightening of liquidity in the financial system could push up short-term rates on certain debt instruments by up to 10 basis points (bps) by the end of March, experts said.

Rates on commercial paper (CP) and certificates of deposit (CD) may go up by 5-10 bps, money market dealers and fund managers told Moneycontrol.

“Going ahead with possible global rate hikes, advance tax and GST outflows, rates may remain under pressure at the shorter end of the curve,” said Sanjay Pawar, fund manager – fixed income at LIC Mutual Fund Asset Management.

Rates edge up

In the past month, rates on these instruments rose by 15-25 bps due to domestic concerns and tight liquidity conditions. However, rates moderated after the Silicon Valley Bank fallout as most investors opted for safety assets as an immediate reaction.

Venkatakrishnan Srinivasan, founder of Rockfort Fincorp, a Mumbai-based brokerage firm, said the sudden fall in yields was temporary and the yield reversal is now happening slowly based on the expected Reserve Bank of India repo rate hike in April, combined with defiant inflationary conditions.

The current rate on CPs issued by non-banking finance companies maturing in three months trades in the range of 7.60-7.90 percent, whereas manufacturing CPs of similar maturity are at 7.45-7.65 percent. Rates on CDs maturing in June were trading at 7.40-7.65 percent.

Commercial paper is an unsecured instrument issued in the form of a promissory note. The original tenor of a CP is seven days to one year. CDs are instruments issued by banks to raise funds.

Also read: How to make the most of fixed deposits when rates are high

Tight liquidity

Liquidity in the banking system is expected to tighten in the coming days due to advance tax payments and auction outflows, dealers said.

“Going ahead, we expect liquidity to tighten significantly amid advance tax collections and auction outflows,” Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said in a report.

Outflows from the banking system are expected to be Rs 2.56 lakh crore during the period from March 13 to March 17 compared with inflows of Rs 1.71 lakh crore, according to the Kotak Mahindra Bank report.

The outflows include auction outflows for treasury bills, state development loans, and advance tax outflows. Inflows include coupon inflows, redemption of T-bills and state loans, and government spending.

Will RBI step in?

Some dealers said the central bank will provide adequate liquidity through variable rate repo operations if the need arises. The RBI injected Rs 82,650 crore on March 10 and Rs 50,000 crore on February 10 through 14-day variable rate repo auctions.

Apart from CP and CD rates, the cut-off yield on treasury bills across maturities rose by 24-32 basis points between February 15 and March 8. On March 15, the cut-off yield on T-bills eased by 11-18 bps, which dealers attributed to improved liquidity conditions.

One bps is one-hundredth of a percentage point.

Surplus liquidity increased to Rs 35,576.87 crore on March 14 from Rs 4,183.87 crore on March 13, as per the RBI’s money market operations.

Srinivasan said it seems the regulator is not comfortable with treasury bills yields going higher than the RBI’s comfort zone. Hence, it is expected that money market yields may continue to be volatile and react based on liquidity, the rate hike and regulatory intervention.

Also read: Does the historic fall in the 2-year treasury bill mean a big correction is coming soon?

Supply outlook

Money market dealers do not expect any significant increase in the supply of CP or CDs as most companies have completed their borrowing programmes.

“We observed not much increase in outstanding CP volume year on year. Hence not expecting significant increase in supply going forward in this financial year,” said Pawar of LIC Mutual Fund.

According to dealers, the remaining supply is expected to be completed smoothly due to firm demand from mutual funds.

“Supply will be there but MFs also have to rollover their investment so there will be no issue,” said Umesh Kumar Tulsyan, managing director of Sovereign Global.