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Thursday, Aug 10, 2006

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Large corporates not affected by interest rate hikes

Priya Nair

No rise in discount rates on commercial paper

The interest rate on commercial paper at the lower end is now down to 6.25 as on July 15.
Spreads between Government papers and CPs are coming down.

Mumbai , Aug 9

For top credit-rated companies at least, the interest rate controversy is a non-issue in so far as the sums mobilised through issuance of commercial paper. In January 2006, the interest rate on commercial paper at the lower end (available to the best credit-rated companies) was 6.50 per cent. That is now down to 6.25 as on July 15, according to the data released by the Reserve Bank of India.

However, for corporates with a lower credit rating, an increase in the cost of borrowings have already become a fact of life. Their commercial paper borrowings are up from 7.75 to 8.3 between January and mid-July this year- in contrast to a nominal hike of 25 basis points in prime lending rate of banks.

But even this now runs the risk of a roll-back, thanks to the latest missive from the Finance Ministry. The discount rates on commercial papers (CP) issued by corporates have not seen much of an increase despite the hike in short term interest rates.

Reasons for this include ample short-term liquidity and good demand from mutual funds, said bankers.

In relative terms, the quantum of monies raised through commercial paper may not be very large relative to the borrowings by large corporate borrowers in the organised sector. But their number is growing. It is up 25 per cent in the last six months or so having grown from Rs 17,415 crore in January to 21,237 crore in July 2006.

"CP rates are bit lower because of their saleability. They can be traded in the secondary market," said the Chief of Treasury with a public sector bank.

"Due to the liquidity available, CPs are not giving much yields. Though rates have gone up in the last six months, in the case of CP, the increase is not as much as in other instruments," said a senior bank official. Even the spreads between the Government papers and CPs are coming down, said bankers. If for instance, the range for a three-month CP is between 7-7.2 per cent, for a 91-day T-bill the yield is around 7.25 per cent.

But not many of the large corporates are issuing CPs today, as they still get loans at competitive levels.

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