Mumbai: Indian short-term debt issuances by companies are likely to surge in July as these firms can raise funds at cheaper rates than bank loans after the base lending rate came into effect from Thursday.
Companies were getting short-term corporate loans from banks at around 5-6% prior to the new base rate regime.
With most banks announcing their base rates, below which they can’t lend, in the band of 7.25-8%, companies will start issuing commercial paper (CP) to raise funds at cheaper rates.
“Companies can manage their treasury better. If the companies get opportunity to raise funds through CPs, they may do so more regularly now,” said R.V.S. Sridhar, president and head of markets in treasury at Axis Bank.
The CP rates are not expected to fall more than 10-15 basis points given the high supply factor in July, dealers said.
“CP rates are unlikely to fall substantially. Yes, the rates will drop on relatively easier liquidity over the coming few weeks. But I don’t believe the rates will go back to levels seen a month and a half back,” said Maneesh Dangi, head of fixed income investments, Birla Sun Life Mutual Fund. Dealers don’t expect the CP rates to rise in July despite an influx of supply, given that rates have already shot up.
The 3-month CP rate has shot up to 6.87%, the highest since 17 April 2009. In the June quarter, the rate was up 112 basis points.
Mutual funds are the biggest subscribers to CPs. However, with credit growth being lasklustre, banks may also deploy their excess funds in the CP market, thereby creating some additional demand for the excess supply.
“I think investment in CPs and CDs (certificate of deposits) have picked up in last few months. Credit pick-up not being as high as envisaged, banks might buy more CPs depending on their liquidity situation,” Sridhar said.
Early signs of companies flocking to the short-term debt market were visible with state-run oil companies issuing CPs on Wednesday.
Indian Oil Corporation raised Rs10 billion through 3-month CPs at 6.15% and Hindustan Petroleum Corporation Ltd will raise Rs3 billion at 6.10%.