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Short-term rates on the rise

December 09, 2005 11:06 IST

In a tell-tale sign of interest rates firming up, the rates of certificates of deposits (CDs) and short-term commercial papers (CPs) have gone up by one percentage point as on date from September.

Commercial banks raise CDs, while corporates use CPs to meet their short-term fund requirements.  More and more banks are taking the CD route to raise fresh liabilities to meet their credit growth. Tracking the movement of CD rates, the rates of CPs are also going up.

A CP is a short term, unsecured, negotiable promissory note with a fixed maturity. It is issued by companies at a discount to the face value and redeemed at face value.

The cost of one-year CD is now 7 per cent, one full percentage point higher than the yield of 364-day treasury bill. The difference between the rates of one year CD and T-bill was 30-40 basis points two months back. One basis point is one hundredth of a percentage point.

A clutch of banks have raised over Rs 5,000 crore (Rs 50 billion) through this route since September. This is marginally cheaper than the bulk deposit which is now costing around 7.25 per cent for one year deposits. Mutual funds are aggressively subscribing to CDs, which are a tradable instrument.

Some MNC-operated non-banking finance company and primary dealers are also putting money in CDs.  A three-month CP now carry rates between 6.25 per cent and 6.5 per cent for India Inc, depending on the rating of a company. This is almost 30-35 basis points higher than the rates prevailing a month ago.

Tightness in the money market and reluctance on part of lenders to participate in the CP market have rendered primary issuances and deals in the secondary market lacklustre.

Attributing the rise in CP rates to tight liquidity in the money market, a senior banker said lenders (commercial banks) were holding on to their cash to maintain liquidity after the redemption of India Millennium Deposits by the end of December.

Roopa Kudva, executive director and chief rating officer, Crisil, said: "Ninety per cent of our ratings on CPs are stable and there are more upgrades than downgrades. The recent rise in CP rates could be viewed as a reflection of the rate hike witnessed across the board in the banking sector and the bond market."

UTI Bank's head of treasury Partha Mukherjee said, in the secondary market the best-rated CPs were traded at 6.20-6.50 per cent, while the ones with lower rating got traded at over 7 per cent.

According to the weekly statistical supplement issued by the Reserve Bank of India, the outstanding amount of CPs stood at Rs 4,354 crore (Rs 43.54 billion) as on November 11 against Rs 3,828 crore (Rs 38.28 billion) a year ago.

Preeti R Iyer & Vidyalaxmi in Mumbai
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