Liquidity management by RBI pushes up CP rates

The liquidity surplus has progressively narrowed in the last three weeks as excess liquidity of banks has been tied up in VRRR.

By Manish M Suvarna

Rates on short-term debt instruments such as commercial papers (CPs) surged sharply by 10-15 basis points this week, due to liquidity management by the Reserve Bank of India (RBI) through variable rate reverse repo (VRRR) operations that withdrew excess surplus liquidity from the banking system.

Additionally, a higher cut-off set by the central bank at VRRR auctions provided directions to the short-term rates and mutual funds, the largest investors in short-term papers, are holding back their investments for ultra-short-term debt papers expected to be issued by non-banking finance companies (NBFCs) later this week for higher returns.

Currently, yields on CPs maturing in three months issued by NBFCs are in the range of 4.05-4.15%, while those on manufacturing companies are trading in the range of 3.70-3.80%, as against 3.55-65%.

“Yields on money market papers, which includes CPs, also have been inching up as liquidity sterilisation is on the cards and there has been frequent VRRR by the central bank to absorb excess liquidity from the system,” said Ajay Manglunia, MD and head, institutional fixed income, at JM Financial.

Since the RBI’s announcement of VRRR auctions in the monetary policy, there was speculation that short-term rates would move up gradually. The liquidity surplus has progressively narrowed in the last three weeks as excess liquidity of banks has been tied up in VRRR.

But money market dealers expect liquidity surplus to widen this week, aided by government spending towards salaries and pensions. Currently, liquidity in the banking system is estimated to be in surplus of around `6.5 lakh crore. “We see that idea is to now make repo rate as operating rate versus reverse repo rate. This itself is an impact of 50-60 bps higher yields in short-term rates,” Manglunia said.

Market participants said fund houses have slowed down their investments in short-term debt papers, as they are waiting for NBFCs to issue IPO-CP. “CP issuances, especially for IPOs, are typically issued at higher yields as compared to the normal CP issuances. Markets could expect issuances in the range of 6% to start with and may inch higher in the later part of the month,” said Anand Nevatia, fund manager at Trust Mutual Fund.

In this and next week, Nykaa and Fino Payments Bank will offer their shares for sale. Nykaa’s IPO will open for subscription on October 28 and will close on November 1, while that of Fino Payments Bank will open for subscription on October 29 and close on November 2.

Dealers with brokerage firms expect rates on short-term debt instruments to inch up a little more in the upcoming days as liquidity is expected to narrow further. “This trend may continue as we move closer to the December RBI policy,” said Pankaj Pathak, fund manager, fixed income, at Quantum Asset Management.