Short rates rise anew as RBI curbs banks

Short-term rates are nearing March levels — as shown by commercial paper (CP) and certificate of deposit (CD) rates — and are expected to move up further with the payment of the first instalment of advance tax for the current financial year falling due later this month.

There is another reason for the imminent tightness in liquidity. According to Arvind Konar, head fixed income, Almondz Global Securities, investments of banks in mutual funds have slowed down after the Reserve Bank of India (RBI) set a cap on May 3.

“Investment by banks in liquid schemes of debt-oriented mutual funds will be subject to a prudential cap of 10% of their net worth as on March 31 of the previous year,” the RBI had said.

That has left fund houses with less cash to invest, so they are negotiating for high CD and CP rates.

A CD is a time deposit with a bank and is generally issued by commercial banks but they can be bought through brokerages also. They bear a specific maturity date, a specified interest rate and can be issued in any denomination, much like bonds.

A CP, on the other hand, is an unsecured, short-term debt instrument issued by a company, typically for financing short-term needs such as inventories.

Maturities on CPs range from three months to a year and the debt is usually issued at a discount, reflecting prevailing market interest rates.

Bank investments in mutual funds stood at Rs106,233 crore for the fortnight ended May 20 compared with Rs120,854 crore in the fortnight ended May 6, RBI data released Friday show.

According to Ajay Manglunia, senior vice-president, Edelweiss Securities, bank investments in mutual funds will come down further due to which CD and CP rates will move up by another 5-10 basis points.

That would mean companies will return to bank credit than raising money by way of CPs.

“The CP rates are too high. We would get 15-25 basis points’ cheaper credit from banks,” said a senior official of a non-banking finance company who did not wish to be named.