Festivals Spark Rebound in India Money Rates as Shoppers Splurge

  • Commercial paper rates rise in October in blow for companies
  • Investors see liquidity deficit widening by end of quarter

Indian companies’ short-term borrowing costs are rising from a five-year low as the festival and marriage season sends households on a shopping spree. That’s bad timing for an economy crying out for investment.

Three-month commercial paper yields climbed in October for the first time in eight months as demand for cash increased with the festive season that started in September with the homage to Ganesh, the elephant god of prosperity, and runs through mid-November with Diwali, the festival of lights. Currency in circulation outside the banking system rose to a record 152.8 trillion rupees ($2.3 trillion) in the week ended Oct. 23, central bank data show.

Higher borrowing costs could compound problems for local firms battling a demand slowdown in Asia’s third-largest economy that’s put sales growth on course for a second straight quarterly decline. Money-market rates are rising even as Reserve Bank of India Governor Raghuram Rajan cut the benchmark repurchase rate by a larger-than-estimated 50 basis points on Sept. 29.

“Companies haven’t been able to fully capitalize on the RBI’s latest move as liquidity has been tight given the cash demand on account of festivals,” Killol Pandya, Mumbai-based head of fixed income at Peerless Funds Management Co., which manages 8.5 billion rupees. “Some firms are deferring their borrowing plans.”

Stalled projects and a surge in bad debts that’s crippled bank lending is hampering Prime Minister Narendra Modi’s efforts to revive investment and boost economic expansion. India will probably grow 7.6 percent this year, below its 9 percent to 10 percent potential expansion, Moody’s Analytics wrote in a report last week.

Sales for the BSE200 Index companies that have reported earnings for the July-September quarter so far have fallen 4.8 percent, data compiled by Bloomberg show. They declined 4.4 percent in the previous quarter.

Spending on everything from automobiles to gold climbs toward the end of the year as festivals are also considered auspicious for new purchases. Demand for gold usually peaks in the final quarter as the wedding season starts in November. Indians buy jewelry as marriage gifts and as part of the bridal trousseau.

The rates on three-month commercial paper rose 18 basis points in October and four basis points this month to 7.73 percent on Tuesday, the highest since Sept. 28, data compiled by Bloomberg show.

Lenders too are paying more for short-term borrowings. Bank notes, or certificates of deposit, due in three months offer 7.28 percent, compared with as low as 6.97 percent in August, data compiled by Bloomberg show. Currency in circulation has risen from this year’s low of 137.8 trillion rupees in January.

“The increase in currency in circulation is because of the festive demand,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “Liquidity is expected to remain tight this quarter.”

Bond Issuance

The yield on benchmark 10-year bonds increased 10 basis points in October after declining in the previous three months, as an uptick in inflation the September damped expectations that the central bank will ease monetary policy further and amid prospects of higher U.S. interest rates. The Federal Reserve last week pivoted toward a December increase.

An increase in government borrowing has also impacted cash availability at lenders, according to SBI DFHI Ltd., a primary dealer. India issued 750 billion rupees of sovereign debt in October, the most in any month since May. The 10-year yield was steady at 7.65 percent in Mumbai on Wednesday.

The average banking-system liquidity turned into a deficit of 396.97 billion rupees in October, after three consecutive months of being in surplus, Kotak Mahindra economists including Bhardwaj wrote in a report dated Nov. 2.

“Higher bond supply contributed to the drain on funds,” said Soumyajit Niyogi, an interest-rate strategist at SBI DFHI in Mumbai. “We expect the liquidity deficit to widen significantly toward the end of the quarter.”

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