Surplus liquidity in Indian Commercial Paper associated with lower CP spread

According to a latest update from the Reserve Bank of India researchers, surplus liquidity in the Indian Commercial Paper (CP) market is associated with lower CP spread and vice versa. Market volatility measure (VIX) increases the spread, indicating a shift in investors preference towards safer assets during periods of increased risk, noted a working Paper titled, Drivers of Commercial Paper Rate Spread An Empirical Assessment under the Reserve Bank of India Working Paper Series. Market expectation of interest rates (OIS 1-month) increases the spread, indicating a rise in CP rates with the market expectation of interest rates going up. An increase in the share of mutual funds, the dominant investors in the CP issuances, dampens the CP spread. The CP issuers are broadly divided into corporates and NBFCs; the results suggest that spreads trend to increase in tandem with an increase in CP issuances by NBFCs.

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