MUMBAI: Indian companies may now have to pay more for working capital and other short-term loans, with the central bank’s neutral policy stance and cautionary tone on consumer prices pointing to higher financing costs.
Wednesday’s monetary policy announcement has put the spotlight firmly on the central bank’s handling of short-term liquidity needs, especially with more than 30 billion dollars in forex forwards lying in the books of the Reserve Bank of India (RBI).
“The RBI’s liquidity stance points to higher rates over a period of time,” said Ajay Manglunia, executive vice-president at Edelweiss Finance. “Markets were going through uncertainties as there was no clarity on liquidity. RBI’s latest policy statement has made it amply clear.”
On an average, rates have gone up about 15-30 basis points across commercial paper issuances in the past one month. Companies raise short-term money (maturities of less than a year) by selling commercial papers bought largely by mutual funds.
“Short-term rates are susceptible to changes in liquidity conditions or expectations on monetary policy and both have had an impacted in recent past,” said Soumyajit Niyogi, associate director, India Ratings. “RBI should ensure easy and cheaper financing options to SMEs to iron out the GST transition. Intermediation cost shouldn’t be too high for those entities, given their limited access to capital markets.”
A day after the RBI’s bi-monthly policy announcement, L&T Finance, Tata Housing Development, ONGC Mangalore Petrochemicals, and Chennai Petroleum Corp. have collectively sold about Rs 2,000 crore CPs across maturities, dealers said. The rates were about 10-20 basis points higher than levels seen a month ago.
"Companies may have to fork out extra cost through their CP borrowings," said Ashish Ghiya, MD, Derivium Tradition India. “The cost has already gone up in the past two months across various issuances due to tightening liquidity. Rates are likely to be higher, with expected erosion in surplus liquidity. CP issuances, too, may rise, with more coroporates preferring the capital market to working capital loans from banks."
By the first half of the next year, liquidity in India’s financial system would come to a level that is consistent with the central bank’s stated neutral stance.
Given the trends in currency in circulation, it is expected that system liquidity may reach neutrality in the first half of 2018, RBI deputy governor Viral Acharya said Wednesday after the policy announcement.
“The RBI will continue to manage the evolving liquidity conditions through a mix of variable rate repo and reverse repo operations of various maturities. These are for handling short-term liquidity.”