The government is not the sole gainer from the low interest rate regime. Companies too have started reaping the benefits. Over the past few days, Larsen & Toubro (L&T) raised three-month commercial paper at 6.95 per cent and Indian Oil Corporation at 6.9 per cent.
But banks are earning a negative spread by subscribing to these short-term instruments because their average cost of funds is over 7 per cent.
In effect, AAA-rated companies are raising money at less than half a percentage point over the bank rate, which is currently 6.5 per cent. "Commercial paper is generally rolled over, which means blue-chips are meeting their working capital needs at just above the bank rate. This is unprecedented," pointed out a senior banker.
Since June 27, when the Reserve Bank of India (RBI) cut the repo rate by 25 basis points and brought it down to 5.75 per cent, the commercial paper rate has come down by over 60 basis points.
The gap between a 90-day commercial paper and 91-day treasury bill is also fast narrowing. It is now about 110 basis points when the cut-off yield at today's 91-day treasury bill auction was 5.82 per cent.
In April, before the announcement of the credit policy, this gap was around 180 basis points because the three-month commercial paper rate was around 7.70 per cent then and the 91-day treasury bill yield was 5.95 per cent.
In other words, yields on sovereign paper have bottomed out but corporate paper rates can still go down as the system is flush with liquidity. In fact, bankers say that the top companies may be able to raise commercial paper at the bank rate soon if the liquidity overhang persists. The average daily inflow through the RBI's repo window has been Rs 17,189 crore over the last fortnight. The maximum bids put in were worth Rs 24,710 crore on June 28.
The borrowing cost for companies is going down at a time when the rate of inflation is inching up. The rate of inflation as measured by the wholesale price index increased from 1.87 per cent on June 8 to 2.24 per cent on June 22. During this period, the cost of borrowing for corporates came down by at least by half a percentage point, bringing the real interest rate drastically down.
The gap between five-year corporate paper and government securities is also narrowing sharply.
It was 190 basis points in April and 105 basis points now. Aluminium major Hindalco has raised five-year money (seven-year paper carrying a call and put option at the end of five years) at 7.95 per cent. Even AA-rated corporates have been able to benefit as the coupon rate on their papers has come down from over 9 per cent to 8.35 per cent.
