Fresh CP issuances more than halved amid rising interest rates

Commercial paper sales have more than halved in the first fortnight of July to nearly Rs 46,000 crore from Rs 1,17,000 crore a year ago as hardening market interest rates has pushed borrowers to conventional bank working capital loans.

Furthermore, the massive outflow of funds from debt schemes due to losses on mark to market has put pressure on rates that mutual funds demand for buying CPs. Outstanding CP issues in the market are down by a fifth to Rs 3.8 lakh crore.

“Slowdown in CP issuances is mainly because of sharp rise in short term rates. And borrowers are moving back to banks,” said Soumyajit Niyogi, director at India Ratings and Research.

Interest rate at the upper end for CPs raised to meet firms’ working capital needs where tenors range from a week to a year have gone upto 12 to 13 per cent, RBI data showed. But even in the rising interest rate scenario a commercial bank’s marginal cost-based lending rate (MCLR) for comparable tenor is less than nine per cent. Loan growth picked up 14.5 per cent as of end July compared to just 6.1 per cent in the same period a year ago driven largely by corporate demand for working capital.

According to the latest assessment of economy by the Reserve Bank of India, last week primary market activity in CPs remained tepid as a sharp rise in interest rates weighed on investors’ appetite.”Consequently, outstanding CP issuances declined to Rs 3.7 lakh crore as on July 31, 2022 as compared with Rs 4.7 lakh crore a year ago,” they said.

A direct contributor to higher interest rates is tight liquidity conditions at a time when demand is rising. Muted government spending in the face of buoyant goods and service tax, GST and direct tax collections contributed to the decline in overall surplus liquidity in the banking system, the RBI economists said. Moreover, the Reserve Bank’s forex operations, which mopped up rupee liquidity, also contributed to tightening of liquidity conditions, they said.

Besides, a significant amount of IPOs were funded through CPs, said analysts. This year we have not seen any big ticket IPO that could create demand for such funds and has caused a further dent in CP sales. “IPO financing has almost dried up, which was a key contributor to CP in the last year,”Niyogisaid.

Investors’ appetite has largely been stagnant, as debt assets under management (AUM) is not growing. On the other hand CD issuances have surged, which is also giving good yields to investors.

Experts think demand CPs may not pick up until NBFCs assets under management rise. “Overall CP issuances are likely to be muted, unless we see strong AUM growth in NBFCs,” Niyogi said.

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