PNB Gilts Ltd has placed commercial paper (CP) worth Rs 10 crore at a rate of 12.65 per cent per annum with ICICI Bank. This makes it the first primary dealer to raise money from the CP market.
The CPs were rated P1+ by Credit Rating Information Services of India Ltd (Crisil). Earlier, PNB Gilts had received permission from the Reserve Bank of India to issue commercial paper up to Rs 25 crore. Raising money through CP is significant as till now the primary dealers funded their operations out of their net-owned funds or Reserve Bank refinance and by borrowing from the call money market. The proceeds of the CP issue will be used to fund the purchase of state government paper at the forthcoming auction on January 20, 1997. While primary dealers are not required to invest in state government paper, they source the paper on behalf of provident funds. According to Y P Narang, managing director, PNB Gilts, the RBI does not provide refinance on state government paper. Hence it was decided to borrow at a fixed rate instead of relying on the call money market.
Given that the calls are ruling at less than 5 per cent, the decision to raise 90-day money at 12.65 per cent has come as a surprise to other market players. Explaining the rationale behind the move to tap the CP market, Narang said, While the call rates might be ruling in single digits now, we expect it to firm up in the next couple of months. He expects the call rates to go beyond 15 per cent by the end of the financial year. While a major portion of the government budgeted borrowing programme might have been completed, it had to tap the market again because of the shortfall of Rs 5,000 crore. The deficit was on account of the failure of the disinvestment process.
This would suck up a portion of the existing liquidity from the system. Given that the duration of the CP is only for 90 days, PNB Gilts will be unaffected by any significant increase in call rates. With a view to boosting the market-making operations, PNB Gilts has also applied for a card on the NSE. SBI Gilts has also applied for membership on the NSE.
