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Informist, Wednesday, Apr. 2, 2025

 

 

By Siddhi Chauhan

 

MUMBAI – Rates on short-term debt instruments fell by more than a percentage point in the first two days of the new financial year on significant improvement in liquidity conditions and in anticipation of the Reserve Bank of India's Monetary Policy Committee adopting a softer tone next week. While rates on three-month commercial papers of non-banking finance companies and manufacturing firms were down 90 basis points from Friday at 6.85-7.05% and 6.65-6.85%, respectively, on Thursday, rates on certificates of deposit maturing in June were down a massive 145 bps at 6.45-6.65%. Availability of funds at much cheaper rates has prompted issuers to prefer the two-month paper over the three-month paper, dealers said.

 

"RBI has infused a lot of liquidity over the past few days... Plus I think some of it is also expectation from the (RBI) policy. Some people expect both a rate cut and a stance change and a few even a CRR (Cash Reserve Ratio) cut amongst other measures to enhance liquidity," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. "Also, the major pressure from the year-end is over now. Normally, there is more demand in the last month of the year and the last quarter of the year."

 

The RBI has been infusing durable liquidity in earnest over the last few months through various instruments as it looked to tackle the deficit caused by its dollar sales, currency leakage, tax payments, and higher-than-expected borrowings by states. Through a combination of the CRR cut in December, open market purchase of gilts, dollar/rupee buy/sell swaps, and long-term variable rate repo auctions, the Indian central bank has so far infused INR 8.22 trillion of durable liquidity, with another INR 600.00 billion of OMO purchases lined up later this month.

 

Consequently, the RBI on Wednesday absorbed INR 1.93 trillion of liquidity on a net basis, the most since Nov. 15. And market participants expect surplus liquidity in the first quarter of 2025-26 (Apr-Mar) to rise further, especially after the RBI transfers its surplus for FY25 to the central government in May. Meanwhile, speculation is also rife that the MPC may loosen its policy stance further to 'accommodative' from 'neutral' at its meeting next week along with a widely-expected repo rate cut of 25 bps.

 

"There is speculation of various options being implemented this time: cut in CRR, change in stance to accommodative, 25-50 bps cut in repo rate. However, we believe that 25 bps would be more likely with stance probably also being changed," Bank of Baroda Chief Economist Madan Sabnavis said in a note Wednesday. While a rate cut of 25 bps has been fully factored in, any further measures by the MPC may lead to a further fall in borrowing costs in the short-term debt segment, market participants said. As such, while rates on three-month CDs were down 90 bps at 6.60-6.80% on Thursday, banks have shied away from raising funds in anticipation of a further fall in rates.

 

"Most state-owned and private banks have enough funds with them, so there doesn't seem to be an immediate requirement to tap the short-term debt market," a dealer at a private bank said. "Also, talks about rate cut in the upcoming MPC have been going around in the market. So those who can hold onto their requirement are waiting for the rates to cool off."

 

While CPs worth INR 181.00 billion have been issued so far in April, funds worth INR 35.00 billion were raised through CDs.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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