When people ask me what are commercial papers, I start with a scene I know well: a company has salaries to pay on Friday, raw material to stock before the festive rush, and customer receipts arriving next month. The gap is real, but it’s temporary. Rather than draw an expensive bank line, the treasury team issues Commercial Paper (CP)—a short-term, unsecured note—to borrow today and repay when cash flows arrive.
In India, CP sits in the money market with maturities typically ranging from 7 days up to one year. It is issued at a discount and redeemed at face value. The math is straightforward. If I subscribe to a ₹1,00,000 face-value CP at ₹97,800 for 120 days, I receive ₹1,00,000 at maturity; the ₹2,200 difference, annualised, is my yield. Because the tenor is short, prices are less sensitive to interest-rate swings than long bonds, which is why treasurers prefer CP for near-term needs.
Why do issuers choose CP? Cost and control. Well-rated corporates and NBFCs can often raise funds at competitive rates without collateral, and they can pick an exact maturity to match their cash cycle. Each issue is backed by a credit rating and placed in demat form under RBI guidelines through approved intermediaries. Historically, institutions dominated the market, but access has widened; sophisticated individuals now participate through brokers and curated platforms.
What should an investor like me weigh before considering CP? First, credit. CP is unsecured; repayment hinges on the issuer’s strength on the due date. Ratings offer an opinion, not a guarantee, so I look beyond the letter grade—recent results, parent support, sector outlook, and reliance on short-term funding. Second, liquidity. While primary allocations are common, the secondary market can be patchy; exiting early may be difficult or require a price concession. Third, reinvestment risk. When a 90- or 180-day CP matures, the next available rate may be lower if the rate cycle has turned down.
It helps to place CP alongside familiar options. Treasury Bills are the government’s short-term paper—rupee-safe and typically lower-yielding than top-tier CP because of the sovereign backing. Certificates of Deposit are short-term notes from banks, usually yielding between T-Bills and CP of similar tenor. Corporate bonds and NCDs extend to longer maturities, pay periodic coupons, and introduce duration risk but can provide steadier cash flows.
Where does CP fit in a portfolio? I treat it as a cash-plus tool—capital that aims to beat savings rates without tying up money for years. It suits investors who understand credit, accept short holding periods, and can tolerate the possibility of low liquidity. Many retail investors gain CP exposure indirectly through money-market or low-duration mutual funds, which diversify across issuers and maturities; that route can be simpler for those who do not want to evaluate single-name risk.
If you are building a broader fixed-income core—mixing short instruments with high-quality bonds—regulated platforms now make it easy to Purchase bonds online across tenors and issuers. My checklist stays consistent: match maturity to need, prioritise quality, read offer documents, and avoid over-concentration in any one issuer.
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