C. Shivkumar

Bangalore, Nov. 12 The effects of a reduction in the Cash Reserve Ratio (CRR) have evaporated as spreads between gilts and top grade corporate papers remained high, at over 700 basis points.

Banking sources said that one of the major factors behind the wide spreads was the tightening liquidity situation in the financial markets. The high spreads were evident from the difference between the 91-day Treasury bill cut-off yields and commercial paper, a short-term corporate debt instrument.

The Hindustan Construction Company Ltd, rated PR1( High Safety) by rating agency CARE, placed its CP at 14.75 per cent or 740 basis points over Wednesday’s 91 day T-bill cut off yield of 7.35 per cent. The rates are also about 175 basis points over SBI’s new prime lending rate.

Bankers said that the tight liquidity situation was partly in view of the high credit offtake. Incremental credit- deposit ratios remained at over 90 per cent so far this year, with credit growing at an average of 30 per cent on a year-on-year basis. The high credit growth resulted in absorption of the Rs 2 lakh crore of liquidity injected into the banking system since the beginning of October this year, they said.

Besides, the liquidity tightening was also prompted by the massive exodus by foreign institutional investors. That the FII exit was likely to continue unabated was evident from the reversal in the non-deliverable forward markets. The one-month NDF rupee-dollar exchange rate reversed its upward momentum and dropped back to Rs 49.24.

One of the major sectors drawing down credit was infrastructure, including oil companies. Infrastructure sectors were drawing on domestic credit lines since foreign credit lines remain choked. Most infrastructure borrowers were now unable to access external commercial borrowings (ECB) as spreads remained high. Corporates are still unable to raise funds even at the current permitted spreads of 300 basis points over the London Inter Bank Offered Rates (LIBOR) for maturities up to five years. This is because the Treasury to Euro Dollar (TED) spread was also at 300 basis points. A wide TED spread implied risk aversion.

The Chief Operating Officer, Dun and Bradstreet Information Services India Ltd,Mr Kaushal Sampat, said, “At these spreads, foreign funds will be difficult, given the crisis of confidence.” Besides, domestic banks were also unwilling to provide bank guarantees to domestic corporates for raising ECBs.

As a result, corporate preference shifted to domestic debt. GMR Energy, implementing the 1,050 MW Kamalanga power project in Orissa, tied up the bulk of its project debt from domestic banks. GMR’ s Chief Financial Officer, Mr A.Subba Rao, said, “We have tied up 90 per cent of the project debt with rupee funds.”

High rates, however, remain a problem. HSBC Bank’s Asian Economic Team head, Mr Robert Prior-Wandesforde, said, “With the policy ball very much in the central bank’s court, further rate action looks certain and could come at any point.” Bankers expect the action to happen as early as next week.

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