Despite the hardening of money market rates brought on by tighter liquidity, corporate fundraising through commercial papers (CPs) increased by 60% in November. India Ratings & Research data shows that companies raised Rs 26,000 crore in November as opposed to Rs 16,300 crore in October. The main reason for raising money was to cover working capital needs.
According to Ajay Manglunia, managing director and head of JM Financial’s investment-grade group, “companies are not in a hurry to raise funds when liquidity is comfortable and rates are low, but when the availability of money is less, everybody would like to pre-emptively cover themselves.” “Everyone wanted to have enough cash on hand due to the tighter liquidity.” Due to bank rate increases, corporations resorted to the money market, he added.
Companies issue CPs as a type of debt to get the short-term funding they need from the money market. Tata Power Company raised Rs 1,650 crore through CPs last month, Sikka Port and Terminals raised Rs 1,400 crore, and L&T raised Rs 1,250 crore. These were among the major issuances.
Companies mostly raised money to cover their increased needs for working capital. There will also be a high working capital requirement because the third quarter usually experiences better credit growth in line with business operations. Additionally, there will be a greater overall need for CPs due to increased input costs brought on by higher inflation, according to Soumyajit Niyogi, director of India Ratings & Research’s core analytical group.
The money market’s overnight rates in November were roughly between 6.85% and 6.75%, as opposed to 6.65% and 6.75% in October. Due to reduced liquidity, rates have been gradually rising over the last few months. The Reserve Bank of India has stated unequivocally that it is uncomfortable with the system’s excess liquidity. More liquidity encourages banks to lend money liberally, which drives up inflation.
Since the central bank is anticipated to maintain tighter liquidity and credit demand typically stays high in the second half of the financial year, Corporate CP issuances are expected to remain high in the upcoming months.
India Ratings & Research estimates that the total amount of corporates, housing finance companies, and NBFCs that issued CP in November was approximately Rs 62,500 crore.
