Yields on commercial papers rose 5-15 basis points (bps) in the last week after the liquidity deficit in the banking system widened. Yield is the return investors get on their investment.
Papers issued by non-banking finance companies saw an uptick in yield of 10-15 bps and those by manufacturing companies saw an uptick of 5-10 bps. One basis point is one-hundredth of a percentage point.
“Despite the Reserve Bank of India’s (RBI) variable rate auctions, liquidity remains in deficit mode. This coupled with RBI's announcement of an increase in risk weights has led to a notable uptick in the issuance of CPs, contributing to a surge in short-term interest rates,” said Ajay Manglunia, managing director and head of the investment group at JM Financial.
Mataprasad Pandey, Vice President, of Arete Capital Service, said as the effect of government spending began to fade out, pressure on liquidity started increasing leading to an uptick in yield.
Also read: Bond market yield curve inversion indicates tight liquidity
Liquidity tightness
In the last few months liquidity in the banking system has remained tight and stayed in deficit in January too.
But in the last week, the liquidity deficit has widened. As per the RBI data, liquidity was in deficit of around Rs 1.57 lakh crore on January 9, which increased to Rs 1.94 lakh crore on January 16. Money-market experts attribute this to the expected outflows from excise tax collections and currency in circulation.
According to a Kotak Mahindra Bank report dated January 15, outflows of Rs 1.84 lakh crore are expected from January 13 to January 19.
Similarly, there were outflows of Rs 1.35 lakh crore during January 6 and January 12, as against the inflows of Rs 98,000 crore during the same period, the report added.
Yield movement
Yield on papers issued by NBFCs maturing in three months rose to 8.20-8.50 percent this week from 8.10-8.30 percent last week, and those on manufacturing companies’ papers rose to 7.70-7.90 percent, from 7.65-7.75 percent last week.
Three months’ commercial papers are very liquid and active in the market.
Similarly, the cut-off yield on 91-day Treasury Bills also rose to 6.9698 percent on January 17 from 6.9275 percent on January 10, as per RBI data.
Also read: India has outpaced several developed nations in ship-turnaround time: PM Modi
The outlook
Money-market experts said that yields are expected to remain high due to tight liquidity conditions.
“Elevated yields are anticipated to persist due to heightened capital requirements,” Manglunia said.
According to Pandey, yields could be under pressure in the coming months as the banking system liquidity has been historically tight in the last quarter of the fiscal.
"The rates on CP are expected to go up by a further 10-15 bps during the quarter," said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.
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