CP, CD rates cool off after change in liquidity rules

Interest rates on Commercial Paper (CP) and Certificates of Deposits (CD) have seen a dip in the past few days.

Interest rates on Commercial Paper (CP) and Certificates of Deposits (CD) have seen a dip in the past few days with banks getting some additional liquidity after the Reserve Bank of India (RBI) changed the Liquidity Coverage Ratio(LCR) rules on June 6.

RBL Bank, for instance, had issued a two-month CD at 7.85% on May 25 but paid only 7.2% for the paper of the same tenor on June 6. Again, IDFC Bank picked up money at 7.71% for a three-month CD on May 17 but was able to borrow at 7.17% via a similar tenor paper on June 11. At 7.91%, South Indian Bank too paid 30 bps less on May 18. However, the lender was able to access money at just 7.61% on June 5.

Ananth Narayan, professor-finance, SPJIMR, observed that while the banking system liquidity is comfortable on average, there has been a liquidity asymmetry building up in the market. “Some banks have been growing their loan assets rapidly, and their term deposit growth has not been keeping pace. On the other hand, other banks have been cautious lenders, and sitting with surplus liquidity,” Narayan explained.

He added the near-absence of inter-bank term money markets has meant that rather than source funds from the surplus banks, lending banks have had to increase their customer deposit rates, and raise money through CDs, etc. “This in turn has pushed up all short term yields, including CP rates,” he said.

Ajay Manglunia, executive VP, Edelweiss, pointed out money market rates tend to move in tandem. “Also, the rate hike fear is gone, no aggressive hike is expected this fiscal. While overall rates have risen by over 100 bps, the RBI hiked the repo by only 25 bps. So, the intensity of the rate hike has faded out,” Manglunia said.

The RBI relaxation allowing banks to count an additional 2% of their Statutory Liquidity Ratio(SLR) for LCR purposes has helped ease pockets of liquidity tightness. Banks looking to lend now have additional bonds to sell and raise liquidity. These bonds could be purchased by the cautious lenders with surplus liquidity. Companies too are benefitting from the additional liquidity with banks. While on May 15, Larsen & Toubro issued a three-month CP at 8.3%, three weeks later, on June 6, the infrastructure player was able to borrow at just 7.85% – 45 bps less – for a paper with the same tenor.

Similarly, HDFC mopped up three-month money at 8.15% on May 21, whereas on June 8, it paid around 60 bps less at 7.58% for money for a similar tenor. Again, M&M Finance issued a 3-month paper on May 21 for 8.4%, but on June 6, it picked up money which was 30 bps cheaper at 8.05%.

Experts also say that the banks with liquidity are unable to lend it to the banks under the prompt corrective action (PCA). As an alternative, they can however sell their additional securities to these banks to increase liquidity in the market.

Source: Financial Express