Mibor floor for short debt on liquidity concerns

As liquidity concerns deepen ahead of the Rs 5,000 crore government borrowing scheduled in the next one week, Mumbai Inter Bank Offered Rate (Mibor) has become the floor for short-term floating-rate debentures. Last month the floor was at least 10 basis points below Mibor.

This week, Usha Martin, Blue Star, DCM Shriram Consolidated and Whirlpool India are among those who raised short-term funds at Mibor or higher.

"We borrowed at higher rates because we fear liquidity would tighten further later this month due to the upcoming government borrowing'', said G D Lakotia, deputy manager-finance, Usha Martin.

Tuesday, when National Stock Exchange's Mibor was 7.22%, Usha Martin issued Rs 15 crore 89-day non-convertible debentures at 5 basis points above Mibor. Such papers have daily put or call option.

Earlier in the month, it issued Rs 12 crore of similar structured NCDs at 35 bps below Mibor. The benchmark was 7.27% on that day.

By February 22, the government is due to auction a government security to borrow Rs 5,000 crore.

"Floating-rate papers are now above Mibor because the near-term outlook about liquidity isn't positive. It is seen tightening further in light of the gilt auction," said Prakash Sharma, manager-corporate finance, LKP Securities.

Rates for floating rate short-term instruments could rise to 10-15 basis points above Mibor after the upcoming gilt auction. A few companies bucked the trend and struck deals below Mibor on Tuesday.

But these deals are seen as exceptions, or "not in line with the market trend and may not continue for long," a dealer at a brokerage house said.

Tightness can be gauged from the fact that since December banks relied heavily on RBI to meet their daily cash reserve needs. The absence of liquidity with banks has affected other players, such as mutual funds.

"Banks are large investors in liquid schemes of mutual funds," noted a dealer. "With the strain on liquidity, they are not investing in the schemes. This has left mutual funds with less money to invest" in short-term debentures.

That has meant a further squeeze in money entering the short-term debt market.

However, demand for short-term funds has risen this week ahead of the auction, and that has pushed rates up. According to merchant bankers, "Right now, it is more a case of borrowers needing funds than investors looking for avenues to deploy their funds."