The yields on commercial papers (CP) and certificates of deposit (CD) fell sharply by 25-30 basis points (bps) in one month due to sustained surplus liquidity in the banking system.
As per data, the yield on CPs issued by non-banking finance companies (NBFCs) maturing in three months remained in 7.60-7.70 percent range on August 14, from 7.85-8.05 percent on June 27. Similarly, the yield on papers issued by manufacturing companies maturing in three months were in the range of 7.20-7.30 percent on August 14, from 7.30-7.50 percent on June 27.
The borrowing cost of banks through CDs went down to 7.15-7.20 percent on August 14 from 7.20-7.35 percent on June 27.
CPs are unsecured, short-term debt instruments issued by corporates to finance short-term liabilities, while CDs are issued by the banks to meet their short-term funding requirements.
"In July and August, we saw a decline of 10-15 basis points (bps), supported by surplus liquidity in the banking system," said V Ramachandra Reddy, head of treasury at The Karur Vysya Bank.
The liquidity in the banking system, which was in the deficit mode for long started getting into the surplus mode since June 27 boosted by government spending.
“With the increase in government spending at the month-end, system liquidity again turned into surplus beginning June 28,” Reserve Bank of India (RBI) Governor Shaktikanta Das said in the August monetary policy.
Liquidity in the banking system is estimated to be in surplus of around Rs 1.40 lakh crore as on August 15, as per the RBI’s money market operation data.
The central bank has conducted various variable rate reverse repo (VRRR) auctions to remove excess surplus liquidity in the banking system, but still surplus sustained.
This has also led to a fall in overnight rates and allowed issuers to tap the market to raise funds for a shorter duration. As per NSDL’s data, companies raised around Rs 1.05 lakh crore through CPs in July, and banks raised Rs 63,760 crore through CDs.
Going ahead, money market experts said that if liquidity conditions remained in the surplus mode, then it will help issuers to raise funds at the cheaper rate.
Reddy further said that since the start of April 2024, three-month Treasury bills (T-bill) rates have dropped by 26 bps, while 3M CD rates have seen a minimal decline of just 7-8 bps. This suggests that banks are eager to roll over and issue new CDs, driving up demand.
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