According to one the best market research company in India; Over the first two weeks of July, commercial paper sales have nearly halved to Rs 46,000 crore from Rs 1,17,000 crore as higher interest rates have forced borrowers to borrow from conventional banks for working capital.
Moreover, due to losses on mark-to-market, mutual funds have been under pressure to lower their rates for buying CPs due to the massive outflow of funds from debt schemes. CP issues outstanding in the market have decreased by a fifth to Rs 3.8 lakh crore.
According to Soumyajit Niyogi, director of India Ratings and Research, the slowdown in CP issuances is mainly due to the sharp rise in short-term rates.
CP rates at the upper end for firms seeking working capital have gone up to 12 to 13 percent, RBI data shows. Commercial banks’ marginal cost-based lending rates (MCLR) for comparable tenors are less than nine percent even under rising interest rates. Loan growth at the end of July, loan growth was 14.5%, up from just 6.1 percent a year earlier, mainly due to corporate demand for working capital.
As a result of a sharp rise in interest rates, primary market activity in central banks remained tepid last week, according to the Reserve Bank of India’s latest economic assessment.” As a result, outstanding CP issuances fell from Rs 4.7 lakh crore a year ago to Rs 3.7 lakh crore by July 31, 2022.
At a time when demand is rising, tight liquidity conditions directly contribute to higher interest rates. RBI economists said that the decline in overall surplus liquidity in the banking system was caused by muted government spending despite buoyant GST, GST, and direct tax collections. A tightening of liquidity conditions was also contributed by the Reserve Bank’s forex operations, which mopped up rupee liquidity.
Analysts also reported that CPs funded a significant amount of IPOs. No big ticket IPOs have been announced this year that could stimulate demand for such funds, resulting in further declines in CP sales. In the past year, CP’s primary source of financing was IPOs, said Niyogis.
There has been a stagnation in investors’ appetite for debt, as debt assets under management (AUM) are not increasing. Conversely, CD issuances have surged, giving investors good yields.
