Companies face soaring short-term debt costs despite RBI support

Mint.On Friday, the National Bank for Agriculture and Rural Development (Nabard) raised about ₹6,000 crore through one-year CDs at 7.35%, around 25 basis points (bps) higher than interest rates seen a week ago.“For a three-year paper, Nabard was willing to pay 7.50%, but the demand was at 7.60-7.70%, so they did not raise funds through three-month maturity but raised one-year paper, and if rates are high, they will borrow short-term,” a senior treasury official said on the condition of anonymity.Treasury officials expect more companies to tap the money market after Nabard, but warn that even short-term borrowing will be challenging.Since the beginning of the month, interest rates on three-month CDs, issued by scheduled commercial banks and select all-India financial institutions (AIFIs), have risen by 25-50bps to 7.30-7.80% as of 13 March, while one-year CD rates have increased by about 25bps to 7.15%, according to data from Derivium Tradition Securities India Pvt. Ltd.Rates on three-month CPs issued by non-banking financial companies (NBFCs) have jumped by 45bps to 7.55-8.05%, while those with one-year maturities have risen by 25-30bps to 7.50-7.60%.Typically, short-term interest rates rise in March due to seasonal fiscal-year-end factors, as banks and financial institutions step up funding activity to maintain liquidity amid tax outflows.“Because of advance tax outflows and goods and services tax (GST) outflows, it was expected that short-term rates would go up, but signs are visible that, despite RBI’s liquidity injection through open market operations, short-term rates have spiked,” the treasury official added.So far, the central bank has conducted two auctions of ₹50,000 crore each.