CP Issuances to Gain Traction, Bond Market to Face Competition from Banks

India Ratings and Research (Ind-Ra) anticipates commercial paper (CP) issuances may gain traction owing to the advent of the Goods and Services Tax (GST). On the other hand, tepid investment demand and excessive banking sector deposits are likely to force banks to increase their focus on capturing incipient credit demands, precisely for 'AAA' and 'AA' rated category borrowers. This could impact activities in the primary bond market.

The agency believes that the implication of the GST is likely to increase working capital requirements for most of the manufacturing entities; therefore the impact is likely to be translated into higher of short-term funds requirements. Moreover, with CP rates being considerably lower than bank's lending rate, it is likely to be a preferred financing option among borrowers, especially in the 'A1+' and 'A1' rated categories.

Ind-Ra believes the reduction in the CP tenure has magnified the overall gross issuances in the primary market. As per the data provided by Prime Database, issuances have mostly been in less than three months category from FY17. The major issuers were financial intermediaries. However, the gross CP issuances reduced to INR2.64 trillion during April-June 2017 versus INR2.91 trillion in April-June 2016 partially attributed to low requirements from public sector financial institutions and energy sector.

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