Fund-raising through commercial papers (CPs) fell 7 percent on-month in December 2022, due to the rise in yields on these instruments.
CPs are debt instruments generally traded by companies to raise funds up to a year.
Dealers said that instead of short-term fund-raising, companies opted for long- term issuances due to the stable yield in that segment. That resulted in bond issuances topping more than a five-year high in December.
“As the policy rate hike in December directly impacted money market instruments like CPs and certificates of deposit, with higher rates for short tenors, issuers were reluctant and chose to raise more long-term bonds,” said Ajay Manglunia, managing director, JM Financial.
What numbers say
According to Prime Database, companies raised Rs 1.14 lakh crore in December 2022, compared to Rs 1.22 lakh crore in the previous month. Fund- raising was Rs 2.49 lakh crore in December 2021.
On a calendar year basis, CP issuance fell over 36 percent to Rs 13.97 lakh crore. Housing Development Finance Corp (HDFC), Indian Oil Corporation (IOC), Reliance Retail Ventures, National Bank of Agriculture and Rural Development (HDFC), and Small Industries Development Bank of India remained the top five issuers in 2022.
“The moderation in primary CP market activities seems to be because of the quarter-end, which has been exacerbated by the sustained tightness in the banking system liquidity. The liquidity situation in the banking system, however, improved in December 2022, owing to an improvement in the balance of payment account,” India Ratings and Research said in a report.
Also read: Certificates of deposit issuance rises to a 5-month high in December on uptick in credit growth
CP maturity in 2023
According to the India Ratings release, CPs maturing in January, February and March 2023 amount to Rs 59,400 crore, Rs 93,000 crore and Rs 78,069 crore, respectively.
Of the aggregate amount of Rs 2.30 lakh crore of CPs maturing over this period, those by corporates amount to Rs 90,700 crore (39 percent), non-banks Rs 99,300 crore (43 percent), public finance entities Rs 31,200 crore (14 percent) and public entities Rs 8,500 crore (4 percent).
“Given the benign primary issuances, the agency does not foresee any refinancing challenges, given by the supportive financing conditions. However, the system liquidity will be the key factor for the movement in CP rates,” the release said.
Money market dealers expect that most redemption will be rolled over by the issuers and they may issue fresh CPs to meet their working capital and funding needs.
Increase in rates
The yields on CPs have increased 2.8 percent since May after the Reserve Bank of India (RBI) started increasing repo rates to tame higher inflation. In May, yields on CPs by NBFCs were in the range of 4.28-4.55 percent. This has increased to 7.15-7.5 percent in December.
Those papers issued by manufacturing companies, which were in the range of 4.10-4.25 percent, have risen to 6.9-7.10 percent.
During this period, the central bank has increased repo rate by 225 basis points (bps) since May. One bps is one hundredth of a percentage point.
Despite this, longer term bond yields have remained stable and have not moved very substantially. This has resulted in the narrowing of spread between long-term and short-term bonds.
Also read: Year-ender: Better fundamentals likely to keep bond yields range-bound next year
Way ahead
Money market dealers expect that most issuers will wait for further CP issuances till budget to get clarity on government borrowings as that could move yields on long-term bonds.
Apart from this, issuers will also wait for the policy announcement by the central bank in February.
“As of now, most market participants are waiting for the budget and policy announcements immediately in the same week. Higher-than-expected borrowing number may have an adverse impact,” Manglunia added.
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