India

Commercial Paper Yields in March Surges to Most in Eight Months

New Delhi: The weighted average yield of commercial papers rose to the highest in eight months after an unexpected increase in the cost of borrowings of Non-Banking Financial Companies (NBFCs).

The yield on commercial papers (CPs) of NBFCs soared to 9.8% in March 2020 from 6.8% in February the same year. During the fiscal FY20, weighted average yields fell to 5.49% in December 2019  from 7.46% in May 2019 but turned north in the last three months of the fiscal year, January to March. In FY19, CPs yielded 7.58%, 65 basis points (100 basis points=1 %)  higher than the previous year (6.92% in FY18). Banking, Financial Services and Insurance sector accounted for over 40% in total CP issuances in March’20 followed by oil exploration with 22%, according to the CARE Rating Agency.

The rise in yields was due to lack of liquidity as Mutual Funds saw redemption. The banks stuck to lower buying and as credit worthiness (how worthy you are to receive new credit) fell, the risk premium surged. Overseas investors pulled out from debt markets during the third and fourth week of March 2020 pushing the liquidity premium further up.

However, Reserve Bank of India’s (RBI) Targeted Long Term Repo Operations helped moderate the rates of paper in the market. The repo operation aimed at supporting liquidity as banks were to deploy the liquidity availed in investment-grade corporate bonds, commercial papers and non-convertible debentures over and above the outstanding level of their investments.

“Banking sector was risk-averse as they did not know which business will survive during the pandemic and which will not,” Indranil Pan, group economist at IDFC first bank said.

Given the risk aversion amongst the investors in mutual funds towards NBFCs (the primary issuers), the overseas CPs dropped to an average of Rs. 5 lakh crore in 2019 and further declined to Rs. 4 lakh crore in the year to date.

On March 31, 2020, the overseas CPs stood at Rs. 3.4 lakh crore, a drop of 29%, from a year earlier and 44% over peak volumes. RBI’s decision of 50000 crore liquidity support to mutual funds came as a breather after Franklin Templeton said that it will close six debt funds and put redemptions on hold.

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