With bank rate rising, cos cosy up to CPs

MUMBAI: Anticipating a higher cost to borrowings from banks, corporates are now opting to tap the market directly for short-term funds despite clear signs of interest rates climbing.

According to the latest figures released by the Reserve Bank of India (RBI) in its weekly statistical supplement (WSS), corporates have raised Rs 4,031 crore in a fortnight between November 15 and November 30, 2006 through commercial papers (CPs). In November, they raised Rs 6,400 crore through this instrument. This is one of the highest amounts that they have raised in a fortnight.

Corporates are accessing CPs, despite interest rates on these instrument firming up. Interest rates have risen from a range of 7.2-8.65% in mid-October to 7.5-9.5% by the end of November. Bankers say that interest rate on direct loans could be far more costly as the cost of funds has gone up for banks which are now going slow on sub-prime lending.

Most corporates are now at the upside of their investment cycle, because of which the funds requirement is very strong. And in such a scenario, CPs still work out to be cheaper than bank loans.

CPs typically are short-term papers maturing from 15 days to one year, that the corporates raise directly from the market. These are generally subscribed to by large investors like, banks, mutual funds, insurance companies FIIs, among others.

In the other developments, foreign exchange reserves almost ended flat, with reserves dipping only $45 million during the week ended December 8 to touch $1,75.4 billion. Most components of reserves (gold , SDR and the reserve tranche position with the IMF) were unchnaged, with only foreign currency assets recording a marginal dip.

The Centre has refrained from resorting to ways and means advances (WMA) — a temporary advance to meet its revenue mismatches — during the week ended December 8. The WMA balance for state governments was at Rs 649 crore, up Rs 263 crore over the previous week’s levels. On the other hand, the Center’s surplus with RBI dipped Rs 2,028 crore during the week to Rs 7,325 crore.