Borrowing rates

Long-term borrowing rates expected to tighten to boost near-term CP issuance: ICRA

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New Delhi: Lower yields and risk aversion towards commercial paper (CP) issued by non-bank financial companies (NBFC) has maintained investor appetite and overall CP outstanding has declined over the past two years. Short-term rates started to firm from the second half of FY2022 onwards due to the increase in liquidity absorption under the variable rate repo, followed by the increase in the off-cycle policy on May 4, 2022.

The tightening of monetary policy as well as expectations of policy rate hikes in the foreseeable future caused the weighted average cost of CP issues to rise to 5.29% in May 2022 from 4.39% in April 2022.

“ICRA expects policy rates to rise by around 110 basis points (bps) in future revisions, bringing the terminal policy rate to 5.5% by September 2022, including a 40 bps hike in the next policy statement on June 8, 2022. While indications of the pace at which the future rate decision will determine the direction of short-term rates, 91-day Treasury bills could eventually peak at 6.0% and the CP borrowing costs could rise further to 6.5% in the near term.” said Anil Gupta, Vice President and Co-Group Head – Financial Sector Ratings, ICRA Ratings.

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Mutual funds (MFs) are typically the largest investors in the CP market, accounting for nearly 70-75% of total assets. As CP performance has improved, inflows into MF short-term debt programs may increase. This could boost demand for CP, although issuance growth will also depend on issuers’ appetite for near-term funding.

In addition, aggregate issuance from NBFCs, which are key issuers (excluding CP issued for initial public offering (IPO) funding and by public financial institutions), saw strong monthly growth in April. -May 2022, partly driven by one-two major NBFCs. However, the share of issuances in the 90-day maturity bucket has been on a downward trend, with the weighted average duration of CP issuances (excluding CPs issued for IPO funding) decreasing. regularly at 116 days in May 2022, compared to 131 days in April 2022 and 181 days. in March 2022.

Conversely, the share of longer-term issues by public sector enterprises (PSUs) increased, with their spreads remaining closer to the yields of 91-day Treasury bills.

“Given the uncertainty over the quantum and timing of rate hikes, investors appear to price in higher repricing risk on longer-term (>90-day) CP issues. Investors seek higher spreads for investments in papers issued by NBFCs, given the sector cap of investment limits for some investors.This, coupled with expectations of higher returns, has led NBFCs to turn to lower-maturity issues. This could lead to a steady increase in the share of CPs in the overall composition of NBFC borrowings,” added Anil Gupta.