Short-term rates fall as demand low, cash in surplus

Mumbai: Short-term rates in India dropped up to 15 basis points in the past three weeks on surplus liquidity even as recent euphoria over initial share sales — and their aggressive financing for potential retail bidders — showed signs of abating after tepid debuts for some of the companies offering their stock to the public.

A basis point is equal to a hundredth of one percentage point. Interest rates have fallen across treasury bills, commercial papers (CPs) and certificates of deposits (CDs) at a time when costs of most long-term funding instruments stayed firm. Reduction in short-term rates should benefit the government and companies raising working capital.

“The demand for short-term money has come down with waning interest in new stock issuances — and their diminishing return potential,” said Ajay Manglunia, managing director, fixed income, JM Financial. Surplus liquidity also helped reduce costs, he said, adding that “both pulled short-term rates down.”


The banking system now has surplus cash of about Rs 7.31 lakh crore, compared with Rs 5.26 lakh crore nearly a month ago. With a raft of initial public offerings (IPO) hitting the market, many investors borrowed money for subscriptions in the hope of stellar listing gains. But not everything stuck to the script. For instance, shares of online auto classified platform CarTrade closed 7.3% below the offer price on Friday. It’s the second IPO in August to list at a discount to its offer price.

Lower Yields on Treasury Bills, CPs
CarTrade is also the third consecutive money-losing public offer for large retail bidders borrowing funds for such investments.

HNIs borrowing IPO subscription money are estimated to have lost Rs 114 a share in the listing of Krsnaa Diagnostics and ₹32 per share in Windlas Biotech.

Yields on treasury bills, or short-duration government securities with 91-, 182- and 364-day maturities, retreated 9-12 basis points in primary sales.

Similarly, commercial papers yielded 10-15 bps lower, with companies raising cheaper money for working capital deployment. Those papers were of one-, two- or three-month maturities.

TVS Credit Services, an NBFC, mopped up three-month money last week at 4.15%. It paid 4.25% for the same quantum of funds and loan duration in the last week of July, JM Financial’s data showed.

Reliance Industries raised Rs 300 crore via three-month CPs last week offering 3.44%, compared with 3.51% offered a week earlier.

“Shorter-duration papers have huge demand compared with long-term papers, given the uncertainty due to the talk of an imminent Fed tapering and high inflation,” said Mahendra Jajoo, chief investment officer, fixed income, Mirae Asset Investment Managers (India). “Ample surplus cash in the system is pulling money market rates down but working capital demand is not as high as it was in the first lockdown last year.”

Rates on CDs with up to three-month maturities decreased up to 14 bps since the second fortnight of July, data from Mirae Asset showed.