RBI has been maintaining cut-off rates above 14 per cent for five-day repos for the past few weeks. This has pushed overnight rates to around 14 per cent. In a situation like this, few lenders are interested to lend money in the CP market where the average yield is around 12 per cent. Dealers said that the trading has gone down by 25-30 per cent in the CP market after the repo rate hike by the central bank.
The apex bank has hiked repo rates as a measure to mop up liquidity from the market to check the weakening of the rupee. But the hike in repo rates has hit corporate borrowing programmes badly.
"The activity in the CP market is linked with call rates. Call rates have gone up following the weak rupee and high repo rates, and this has kept banks away from lending," said a primary dealer.
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A dealer with a private sector bank said, "Nobody wants to lock-in their money for three months in such a volatile situation, that too at a rate two-three per cent lower than the repo and call rates."
A primary dealer said, "Banks do not find any corporates to pay a high rate of more than 14 per cent and thus are naturally away from the CP market." "It seems that RBI is ready to sacrifice corporates' interest to cool down the rupee," he added.
The volatile situation in the forex market has made players to move cautiously. The treasury head at a private sector bank, "Players in the market are not sure where the rupee will go and if it crosses the 46-market, RBI may come with a fresh round of hike in bank rates and cash reserve ratio." In a situation like this, it is not worth locking in liquidity for three months, he pointed out.