CP issuances fall to 1-year low in October as rates rise by 30 bps

Issues of commercial paper fell to nearly a one-year low in October due to rising rates caused by tight liquidity conditions, according to market participants.

Commercial paper worth Rs 74,804 crore was issued in October, the lowest since October last year.

On a month-on-month basis, the issuances fell by around 38 per cent. There were issuances of more than Rs 1.21 trillion in September, according to the data with Clearing Corporation of India Ltd (CCIL).

The rates on the short-term debt instrument rose by 30 basis points across tenures in October because liquidity remained in deficit mode during the month, on the back of advance tax outflows and goods and services tax payments.

“Commercial paper is usually taken up by mutual funds. When liquidity in call rates is higher, banks don’t keep money in the liquid fund. The overnight CBLO (collateralised borrowing and lending obligation) and call rates are higher. So, people, rather than buying commercial paper, would have chosen to park money in the CBLO. If liquidity is negative, people borrow rather than lend to the market,” said Ajay Manglunia, managing director at JM Financial.

“From here, we expect liquidity to be tighter, but not too much in deficit or surplus mode,” he added.

Commercial paper is an unsecured form of short-term debt issued by corporations, and it serves as a financial tool primarily directed at addressing immediate financial obligations.

Liquidity has largely remained in deficit since September 15. Deficit liquidity neared Rs 1.47 trillion on September 19, the highest since January 29, 2020, when the banking-system liquidity deficit went up to Rs 3 trillion. Liquidity went into deficit mode on August 21 for the first time this financial year.

The Reserve Bank of India infused Rs 46,611 crore into the banking system on Sunday, November 5, followed by Rs 41,142 crore on Friday, November 10.

“The rates on commercial paper are going up because of tight liquidity, but issuers are reluctant to put out paper at higher rates. We as an industry are not getting incremental flows in short-tenor schemes and so investments in CP are incrementally lower. That’s why the issuances might have fallen,” said Dwijendra Srivastava, executive vice-president and chief investment officer (debt), Sundaram Asset Management. “If issuances keep falling, it will lead to a mismatch, and fall in outstanding amounts,” he added.

Market participants expect the tight liquidity conditions to persist in the current quarter. Meanwhile, a section of the market says the central bank might not conduct open market operations (OMOs).

In his monetary policy statement, Reserve Bank of India Governor Shaktikanta Das had said the central bank might conduct OMO auctions to mop up liquidity.

The central bank had not given any timeline for OMOs and said it would depend on the liquidity situation.