=MONEY market rates have hit multi-year lows after the surprise 50-basis-point rate cut by the Reserve Bank of India (RBI) in the September 29 credit policy.
Call money rate, or the overnight rate at which banks lend money to each other, hit 6.77% on Tuesday, which is the lowest since late July 2013.
Commercial paper (CP) — money market instruments issued by corporates to raise short-term funds — rates have come down by at least 30 bps since the repo rate was reduced on Tuesday.
Bloomberg data show that Exim Bank issued two-month CPs at a yield of 7.10% on Thursday whereas it paid 7.42% for the same tenure on September 24 — indicating a 32-bps fall in the yields after the repo rate cut.
Data also show that Steel Authority of India (SAIL) issued two-month CPs at 7.08% on Thursday while it had paid 7.48% for a similar-tenure paper on August 20.
Lakshmi Iyer, CIO debt & head products, Kotak Mahindra AMC, confirms that after the 50-bps rate cut, yields on commercial papers and certificate of deposits have come down by at least 30-40 bps.
“The entire yield curve is between 7% and 7.25% at the shorter end as of now as the overnight rates have hit as low as 6.75%,” Iyer added.
Interest rate derivatives are also seeing movements after the fall in interest rate. The one-year overnight indexed swap (OIS) rate hit 7.03% on Tuesday, marking the lowest level since January 2011.
This fall in rates reflects an immediate transmission of rate cut to the money market yields unlike in the case of banks where the base rates are still to catch up with the momentum of the 125-bps cut in the repo since the beginning of 2015.
So far, major banks have cut their base rates by as much as 50-70 bps since the beginning of 2015 where as money market rates have seen almost a 120-bps fall.
Bloomberg data show Axis Bank issued a one-year CD at a rate of 7.35% on Thursday whereas it paid 8.51% for the same tenure in early January — a 116-bps fall.
The RBI has been asserting the need for further transmission of rate reduction through the banking system. In its September policy, the central bank had said that markets have transmitted the past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent.
“The median base lending rates of banks have fallen by only about 30 bps despite extremely easy liquidity conditions. This is a fraction of the 75 bps of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank,” the central bank said in the policy statement.
Following Tuesday’s 50-bps cut in the repo and the governor’s push for further transmission of this reduction in rates, banks have now begun another round of base rate reduction. The country’s largest lender, State Bank of India, reduced its base rate by 40 bps to 9.30% on Tuesday with many other banks following suit.
With the latest downward correction in rates, market experts believe some sectors that have remained inactive in the CP market may now try to make a come back.
“Because of easing rates, many of the manufacturing sector NBFCs are likely to start approaching the CP market. You may see some sort of pick-up in the activity here, which had seen a slowdown over the past couple of months,” Iyer said.
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