Short-term rates rise as liquidity dries up

RBI to infuse ₹10,000 cr via OMO

The liquidity crisis at IL&FS, the quarter-end rush to dress up balance sheets by banks and redemption pressure on mutual funds (MFs) have all combined to trigger a liquidity deficit in the system which has led to short-term rates on commercial papers (CPs) increasing up to 50 basis points (bps) within a week, according to bankers.

The rate on three-month CPs is about 8.5%, up 40-50 bps as compared to a week ago. The rate on certificate of deposits of similar maturity is about 7.8%, up 20 bps.

This prompted the Reserve Bank of India to announce late on Monday, that it will conduct a open market operation (OMO) on Thursday to purchase government bonds to infuse liquidity worth ₹10,000 crore into the system.

“The system liquidity is negative to the tune of ₹1.3 lakh crore as we are nearing the end of the quarter. All the short-term rates have gone up with the three month CP rates hovering around 8.25-8.5%, up by 25-50 bps, as compared to a week ago,” said Ajay Malgunia, head of fixed income, Edelweiss Securities.

NBFCs hit hard

Bankers said that the recent crisis in IL&FS and the redemption pressure on MFs had played a role in hardening of the rates. The IL&FS crisis had also impacted other non-banking finance companies (NBFCs) which are also facing increase in borrowing cost.

Banks and mutual funds are the main sources of funding for housing finance companies and other NBFCs contributing about 40% and 30%, respectively, of their funding needs.

“While the lines of credit from banks are easier to roll over and insurance provides longer [term] funding, the paper with mutual funds tends to be short-term. Fifty-five per cent of NBFC paper with MFs has less than 90-day maturities and could lead to redemption related pressures,” broking firm CLSA said in a note.

With MFs becoming a key source of short-term liquidity, estimates suggest that the CPs of NBFCs have gone up three times since March 2016 and MFs now reportedly hold 60% of total NBFC CP issuance.

Even if rating agencies have reaffirmed the NBFC ratings, MFs are expected to cap or cut down their NBFC exposures .

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Printable version | Feb 17, 2020 8:40:57 PM |

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