Short-term rates fall amid rate cut hopes

The Street is expecting a 25 basis points cut in the repo rate, which currently stands at 7.50%

Short-term rates have eased in the past few days on hopes the Reserve Bank (RBI) would cut rates next month, helping borrowers raise cheaper funds.

The rates have dropped by 15-20 basis points in the past 10 days, according to estimates.

RBI will review the monetary policy next month and the Street expects a 25-basis-point cut in the repo rate, currently at 7.50 per cent.

Short-term instruments include certificates of deposit (CD), issued by banks, and commercial paper (CP), issued by companies. These instruments have a maturity tenure of 1-12 months.

Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund, said: “Rates have been easing because some maturities in CDs and CP of tenures ranging between one and three months are coming up for most fund houses. Besides that, there are not many issuers. Markets also anticipate a rate cut in June. In the past 10 days, short-term rates have dropped by 15-20 basis points.”

According to issue arrangers, Union Bank of India and Vijaya Bank on Wednesday raised three-month CDs at 8.08 per cent and 8.16 per cent, respectively. Among the CP issuances, Magma Fincorp raised a two-month instrument at 8.45 per cent, while National Fertilizers raised a June 2015 maturity paper at 8.30 per cent.

  Data released last week showed the Consumer Price Index-based inflation for April eased to 4.86 per cent, the lowest in four months, on the back of another month of declining food prices. The inflation has been undershooting RBI's latest inflation trajectory, triggering rate cut hopes.

“Rates had gone up due to volatility in the markets,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. “There were concerns that fund houses may conserve cash instead of making more investments. Now that the markets have largely stabilised a bit and are improving, fund houses holding cash to meet any redemptions have started deploying money actively.”

RBI is probably not comfortable with higher short-term rates. This was evident from the fact that last week, the central bank had rejected bids partially in the treasury bill's auction due to higher cut-offs.

Wednesday's treasury bill auction for 91-days and 182-days sailed smoothly. In last week’s 91-day treasury bill’s auction, the cut-off was 7.977 per cent compared with Wednesday’s 7.89 per cent.

Last week in the 91-day treasury bills auction, RBI had accepted Rs 6,096 crore of offers, less than the Rs 8,000-crore target. In last week's 364-day treasury bills auction, the central bank did not accept any bids. The auction was for a notified amount of Rs 6,000 crore.