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Banks putting more surplus funds in CPs as rates rise
April 25, 2022
Commercial paper rates have risen 15 to 20 basis points in around ten days, reducing the amount of funds banks deposit with the bank and increasing working capital loans from commercial banks.
Commercial papers (CPs) are shorter-duration debt instruments generally issued by organizations with maturities of up to one year. A basis point is 0.01 percentage point.
While bank financing remains more expensive than market rates, lower-rated organizations are probably going to opt for bank financing over floating CPs.
“Companies raising working capital had no choice but to offer higher rates for their CP issues after the last monetary policy,” he said. Ajay Manglunia is managing director and head of the debt capital market in Financial JM. “Mutual funds and banks can’t be tricked in unless they offer rates above runs batted in windows like VRRR (variable-rate reverse repo) or SDF (permanent deposit facility).”
The RBI introduced SDF in its bi-monthly policy announced on April 8, a platform where banks can park surplus funds at 3.75% compared with 3.35% in reverse repos.
Banks parked ₹1.18 lakh crore in one-day SDF on Thursday versus ₹2.35 lakh crore in three-day SDF on April 8, as per RBI data.
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