The Reserve Bank of India’s (RBI) monthly bulletin, released on July 17, 2023, revealed that the yield on 10-year government securities has increased, and investors have moved to commercial papers due to lower fund mobilization of certificates of deposit (CDs) in the primary market.
Trends in CDs and CPs
RBI reports a lower fund mobilisation of certificates of deposit (CDs) in the primary market for the current year compared to the previous year. CDs are negotiable money market instruments issued by banks and financial institutions, typically with a maturity of not less than seven days to one year. Issuances of CDs at Rs. 1.45 lakh crore during 2023-24 till June 30, 2023, were lower than Rs.1.54 lakh crore in the corresponding period of the previous year. CDs usually provide higher returns than bank fixed deposits (FDs). The RBI bulletin provides investors with valuable information on the Indian debt market, which includes G-Secs, bonds, and CDs. It also contains information on fund mobilisation trends and yields on CDs, commercial papers (CPs), and bonds.
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While the fund mobilisation through CDs has reduced, there has been an increase in CP issuances, indicating higher activity in this short-term security market. A CP is a short-term security (7 days to 365 days) issued by a corporate entity (other than a bank) at a discount to the face value. While CPs worth Rs.3.80 lakh crore were issued till June 30, 2023, only CPs worth Rs. 3.48 lakh crore were issued in the corresponding period of the previous year.
The RBI bulletin said that the yields on 3-month CDs and commercial paper for non-banking financial companies remained stable but above the upper band of the corridor.
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The corridor in the RBI's monetary policy refers to the range between the Marginal Standing Facility Rate and the Standing Deposit Facility Rate. The standing deposit facility (SDF) rate is at 6.25 per cent, and the marginal standing facility (MSF) rate is at 6.75 per cent.
Domestic Bond Yields
Domestic bond yields have shown a hardening bias, with the 10-year benchmark government securities (7.26 per cent GS 2033) closing at 7.12 per cent on July 12, 2023, up from 7.04 per cent on June 15, 2023. Factors such as stronger-than-expected US GDP data and a rise in US treasury yields have influenced domestic bond yields, RBI noted.
Corporate bond yields also experienced a hardening trend, although risk premia showed a mixed trend, the bulletin said. RBI noted that the average risk premia in the bond market (5-year AAA minus 5-year G-sec) declined by seven bps.
The bulletin highlights that funds mobilised through corporate bond issuances in May 2023 (Rs 0.84 lakh crore) were significantly higher than those in the previous year (Rs 0.18 lakh crore).
Investors in the bond market should closely monitor these trends and conduct thorough research before making any investment decisions in the bond market.
