Mumbai: Banks are staring at a loss of demand for working capital loans from companies as interest rates on short-term paper fall below the reverse repo rate, the rate at which banks park surplus money with the Reserve Bank of India.

While firms such as HDFC Ltd, Godrej Industries, Aditya Birla Finance, and NABARD are raising cheap funds, it also reflects the transmission of lower rates pushed by the central bank and the cash-rich companies’ choice to keep it in mutual funds rather than investing in new projects.

“CP (Commercial Paper) rates in the secondary market have significantly dropped amid sloshing system liquidity and muted issuances,” said Soumyajit Niyogi, associate director at India Ratings. “Companies are not in a hurry to kick-start new investments. Rather, they are raising from the capital market either for working capital needs or to pay existing bank loans wherever feasible. Unprecedented liquidity is putting challenge for commercial banks in terms of pricing of assets & liabilities.”

Commercial papers issued by Godrej Industries, yielded 3.28-3.30% with three-month maturities earlier in the month. India’s largest home financier HDFC Ltd’s three-month CPs have yielded 3.26%. Government-backed NABARD’s papers are yielding 17 basis points lower than the reverse repo rate. The reverse repo is now at 3.35%.

The RBI, though constrained in interest rate reductions due to rising prices, has promised to keep the rates low with abundant liquidity aimed at transmission and smooth passing of government’s borrowing.

While the central bank looks to boost investments, companies left with spare capacities are conserving cash and wait to see demand acceleration before investing to create fresh capacities. But the RBI’s objective to keep rates low is working.

The average rates of CPs, short-term debt instruments issued by non-banking finance companies and corporates with 45-90-day maturities, were at 4-4.3% in October compared with 6.65-6.7% offered by the State Bank of India’s three-and-six-month MCLRs, show data from India Ratings. This has remained almost the same in November.

“Some company CPs have been trading well below the reverse repo in the past few weeks reflecting a shift,” said Mahendra Jajoo, CIO – fixed income at Mirae Asset Management.

“With improved investor appetite and vibrancy in the debt capital market, the certainty on availability of funding at competitive rates has improved,” Anil Gupta sector head – financial sector ratings, ICRA said in a note.

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