Commercial papers (CPs) are shorter duration debt instruments generally issued by companies with maturities up to one year. One basis point is 0.01 percentage point.
While bank funding is still more expensive than the market rates, lesser rated companies are likely to move towards bank funding rather than floating CPs.
“Companies raising working capital had little option but to offer higher rates for their CP issuances after the latest monetary policy,” said Ajay Manglunia, managing director and head of debt capital market at JM Financial. “Mutual funds and banks cannot be attracted unless those offer rates higher than RBI windows like VRRR (variable rate reverse repo) or SDF (standing deposit facility).”
The RBI introduced SDF in its bi-monthly policy announced on April 8, a platform where banks can park surplus funds at 3.75% compared with 3.35% in reverse repo.
Banks parked ₹1.18 lakh crore in one-day SDF on Thursday versus ₹2.35 lakh crore on three-day SDF on April 8, show data from the RBI.
“Banks can earn higher by putting surplus funds in CPs,” said Madan Sabnavis, chief economist at Bank of Baroda. “Everything depends on the individual bank’s asset liability management. Generally, CPs yield higher than the regulatory windows but lower than banks’ lending rates (short-term).”
CEAT raised three-month CPs offering 4.14% on the day RBI spelt out the bi-monthly policy. The tyre company sold those similar maturity securities at 4.30% about a week ago. During the same period, Godrej Industries paid about 15 basis points higher while selling three-month CPs, which yielded 4.20% last Monday in the primary market. All such CPs are rated as A1+, a grade considered creditworthy enough to invest.
Treasury bills, the shorter duration sovereign papers that set benchmarks for short-term rates, yielded 9-25 basis points higher across maturities in the primary sales.