Mixed denominations of Indian rupee banknotes

Commercial Paper Borrowings Jump In June As Working Capital Needs Rise

Indian firms borrowed more using short term market instruments like commercial paper in the month of June, as working capital requirements rose. A drop in interest rates for short term borrowings also allowed non-bank finance companies and corporates to shift borrowings back to market instruments from banks.

Commercial paper issuances rose 51.3 percent in June compared to a month ago, shows RBI data. The quantum of borrowings in June was at the highest since March 2017. RBI data for commercial paper borrowings comes with a lag.

The surge in commercial paper borrowings can be attributed to a pick-up in working capital needs across the industry following the introduction of the Goods and Services Tax, said Soumyajit Niyogi, associate director at India Ratings and Research. He, however, pointed out that borrowings in the April-June quarter remained lower than in the previous two quarters.

Short term borrowings had moved from bonds to banks as interest rates have risen quicker in the debt markets. A jump in the benchmark government bond yields starting September meant that corporate borrowing costs through debt instruments rose. This prompted a shift of borrowings towards banks, which have seen credit growth recover back to double digits.

The shift back towards market borrowings is opportunistic as rates on some maturities of commercial paper fell in June. For instance, for commercial paper maturing in two months the rates fell by more than 100 basis points at the start of June. This prompted a jump in short term borrowings via this instrument, said market participants.

The yield curve was steeper for longer dated issuances, even as yields for CPs of upto two months eased, leaving a substantial spread. This was despite continuing volatility in the money market.
Lakshmi Iyer, Head - Fixed Income, Kotak Mahindra Asset Management 

Commercial paper tenors typically range from a minimum of seven days to a maximum of one year. It is an unsecured money market instrument issued in the form of a promissory note.

According to Niyogi, commercial paper issuances could see an increase in the coming months if rates remain low. A number of public sector banks are constrained in lending due to restrictions placed by the Reserve Bank of India under the prompt corrective action framework. This could prompt borrowers to tap the debt markets, he said.