India commercial paper rates may rise further as liquidity dries up: Analysts

Short-term rates, which have been edging higher since the Reserve Bank of India started raising rates last year, have already hit their highest level in over four years because the liquidity deficit in the banking system is seen widening and the government has stepped up borrowing via treasury bills at the end of the financial year.

Earlier this week, state-run financial institution NABARD raised three-month funds at 7.65%, which was over 40 basis points higher than what it paid for a similar paper a month ago.

Shadow lenders Bajaj Finance, Aditya Birla Finance and Tata Capital Financial, which are regular issuers, paid 7.84%-7.90% for a three-month paper, up 20-30 bps in the last two weeks. These rates are at the highest level since October-November 2018.

“We were already seeing a rise in rates of commercial papers, and companies will have to shell out even more with tighter liquidity conditions likely in March,” said Anand Nevatia, fund manager with Trust Mutual Fund.

The Refinitiv benchmark CP index for non-bank financial companies, which are the largest borrowers in the CP market, showed that the rates have jumped to their highest levels since March 2020, when the pandemic hit. Barring the pandemic period, the rates are at the highest since November 2018.

The recent jump in CP rates is seen across categories, with even top-rated companies paying more, market participants said. “Since the current rise in yields is more due to broader factors and not any sector or a company-specific issue, we are seeing a uniform jump,” said Venkatakrishnan Srinivasan, founder and managing partner of debt advisory firm Rockfort Fincap.

“The three-month CP rates of highly rated companies may remain above 7.75%, while the one-year rates may linger around 8.25%, unless the RBI induces more liquidity in the system,” Srinivasan said.

New Delhi is set to borrow an additional 500 billion rupees ($6.06 billion) through a sale of Treasury Bills in March. Banking system liquidity stayed in deficit for most of February and could spiral down with advance tax and GST payments.

“We have seen short-term yields soaring because of tightening liquidity and recent higher inflation prints which have led to market disagreement on terminal rate expectations,” said Sanjay Pawar fixed income fund manager at LIC Mutual Fund.