Yield on short-term debt instruments rises 15-20 bps in December on tight liquidity

Interest rates

The yield on the short-term debt instruments such as commercial papers and certificates of deposit rose around 15-20 basis points (bps) in December on tight liquidity conditions in the banking system.

One basis point is one hundredth of a percentage point.

Data compiled by Moneycontrol showed that the yield on commercial papers of non-banking finance companies (NBFC) rose by 20 bps, while those of manufacturing companies rose 10 bps as on December 29. Similarly, the yield on certificates of deposit also rose 10 bps.

A CD is a short-term debt instrument used by banks to garner funds. A CP, on the other hand, is an unsecured money market instrument issued in the form of a promissory note by corporate borrowers to diversify their sources of short-term borrowings and provide an additional instrument to investors.

“The banking system liquidity deficit substantially increased during the quarter from a marginal deficit to a historic high, which pushed short term rates higher,” said V. Ramachandra Reddy, DGM – Head, Treasury, Karur Vysya Bank.

Further, Jyoti Prakash Gadia, Managing Director at Resurgent India, said short-term bond yields bounced back in December anticipating higher inflation and comparatively higher borrowings in the last three months of the financial year.

In December, liquidity in the banking system remained in a huge deficit and touched a high of over 7.5 years. This was mainly after outflows on account of advance tax and goods and services tax (GST), experts said.

Liquidity in the banking system was estimated to be in deficit of around Rs 1.86 lakh crore as on December 29, the Reserve Bank of India’s (RBI) money market operation showed.

Also read: NBFCs’ bank borrowing up as of September 2023, shows RBI data

Rate movement

The yield on NBFC-issued commercial papers maturing in three months, which was in the range of 7.85-8.05 percent as on November 30, rose to 8.00-8.20 percent on December 29, data showed.

Similarly, the yield on commercial papers issued by manufacturing companies rose to 7.45-7.65 percent on December 29, from 7.40-7.65 percent on November 30.

On the other hand, the yield on certificates of deposit rose to 7.40-7.60 percent at the end of December, from 7.30-7.50 percent at the end of November.

The cut-off yield on Treasury Bills (T-Bill) also saw an upward trend till the middle of December, but fell marginally by the end of the month.

The cut-off yield set on the 91-day T-Bill on December 27 was 6.9300 percent, and on the 182-day it was set at 7.1554 percent. The cut-off yield on the 364-day T-Bill was 7.13 percent on December 27.

Tight liquidity conditions

Liquidity in the banking system remained in a huge deficit in December, mainly due to tax outflows from the system.

Usually, during the end of the quarter, there is always pressure on liquidity in the banking system, experts said. This is due to huge outflows of GST worth around Rs 1.5 lakh crore and advance tax payments of around Rs 1 lakh crore, the experts added.

To support liquidity, the RBI has conducted four variable rate repo auctions, but that, too, did not help to combat higher deficit liquidity. In all these auctions, the central bank has received bids 3-4 times higher than the notified amount.

Money market experts said the central bank will support liquidity in the future. “Liquidity is expected to be scarce in the near term. However, with the assurance of the regulator being watchful and supportive, there is likely to be an easing of liquidity in the near future,” said Gadia.

Also read: Bond Street Outlook 2024 | Yields likely to see downward movement on US rate cut expectations, FPI inflows

Outlook

Experts said that the yield on these instruments will remain higher for some months, until liquidity is in deficit mode.

“One can expect that the rates for short-term debt will continue at elevated levels due to strong demand from issuers, with the duration low in anticipation of an easing cycle in 2024,” Reddy added.