The firming up of bond yields
in the last one year has improved attractiveness of short-term paper such as commercial paper
(CP). The pool of outstanding CPs saw a 96 per cent growth at Rs 6.39 trillion in 12 months ended July 2018, according to rating agency ICRA.
It, however, warned that such excess rise carries certain risks, such as rollover paper
on maturity and liquidity.
The rise was also partly due to CPs issued for funding Initial Public Offerings for HDFC Asset Management Company. It has spiked the CP outstanding volume by Rs 700 billion. However, even excluding this, the YoY growth in CP stood strong at 75 per cent, ICRA
While the CP rates have hardened, the spread over the call money rates also widened from 60-80 bps earlier to 130-140 bps per cent during Q4FY2018 and Q1FY2019.
Excess reliance on short-term debt poses rollover risks and hence liquidity risks for the borrowers.
Further, the liquidity conditions may remain tighter in H2FY2019 due to factors such as like onset of busy season for credit offtake and rise in currency circulation with the public.
The rising yields has had an opposite effect on activity bond market activity. The debt issuances
declined by 34 per cent on year-on-year basis. The volume of fresh bond issuances (private placement + public issue) declined to Rs 1.16 trillion during Q1FY2019 as compared to Rs 1.75 trillion during Q1FY2018.
The companies are expected to gradually replace these short-term liabilities with long-term liabilities to lower cash-flow mismatches.