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Explained | Why are short-term rates crashing?

Excess liquidity, fears of delayed recovery and rate cut hopes have sunk short-term rates.

November 28, 2020 / 09:02 PM IST

State-run NTPC on November 27 raised Rs 2,000 crore issuing 91-day commercial paper offering a yield of 2.97 percent, surprising the markets. A clutch of other companies, too, raised less than Rs1,000 crore each, offering 3-3.6 percent in the last two days.

This is not normal. So, why are short-term rates crashing?

Abundant liquidity sloshing around in the market, fears of delayed economic recovery coupled with rate-cut hopes have sunk short-term rates. Some mutual funds (MFs) were deploying surplus funds at too low short-term rates in corporate papers, treasury dealers said.

Also, fears of re-emergence of COVID-19 were playing out in the market, they said.

“Some mutual funds are parking their surplus in short-term papers. The accommodative policy of the RBI and the fears of a re-emergence of COVID-19 should keep the short-term rates low,” said Harihar Karishnamoorthy, treasurer at FirstRand Bank.

The Reserve Bank of India (RBI) has been maintaining an accommodative stance. It kept the key rates unchanged in the October policy review and continued with the accommodative stance to support growth. Since February 2019, the central bank has cut key lending rate by 250 bps.

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Banks parked Rs 6.7 lakh crore in the reverse repo window on November 26 at 3.35 percent. Mutual funds are lending even below this rate.

What will decide the course of interest rates?

Cues on economic recovery will be the key. If recovery doesn’t happen as quickly as expected, the monetary policy committee, the RBI’s rate-setting panel, will be under pressure to cut repo rate, keeping the rates low.

The coronavirus situation will also prove critical. There are fears that the rising infections could bring back lockdown, if that happens it will further delay the recovery and demand situation.

As of now, MFs do not have many avenues to deploy their excess cash and are hence parking part of their money in AAA corporate papers at any rate available, dealers said.
Dinesh Unnikrishnan
first published: Nov 27, 2020 05:16 pm
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