Rates on certificates of deposit (CDs) increased 25-30 basis points on Tuesday, as banks rushed to refinance maturing debt, meet year-end targets and prepare for withdrawal pressure from companies, ahead of the deadline for advance tax payments. A lack of participation from mutual funds also helped raise the rates, said bankers.
CDs are short-term debt instruments issued by banks to raise funds for up to one year. Mutual funds and banks are major investors in these instruments.
Market participants said on Tuesday, banks raised about Rs 6,000 crore through deals that included three Rs 1,000-crore ones. Axis Bank, UCO Bank, IDBI Bank and Indian Overseas Bank were among the banks that issued CDs on Tuesday. CDs maturing in three months were issued at 11.5-11.6 per cent, while those maturing in six months were issued at 11.1-11.2 per cent. One-year maturities had a rate of 10.8-11 per cent on Tuesday.
Bankers said Rs 1.5 lakh crore worth of CDs issued earlier were lined up for maturity this month. T S Srinivasan, general manager (treasury), Indian Overseas Bank, said, "Rollovers are happening at a higher rate, as investors are not keen on participating at this point."
While mutual funds are facing redemption pressures, banks with surplus funds are deploying these to boost credit growth, instead of lending in the money market. Mutual funds are also not aggressive on investing in CDs, owing to recent guidelines by the Securities and Exchange Board of India that mandates these to mark-to-market all debt investments with maturity periods of more than 60 days.
Liquidity in the banking system continues to be more than double the central bank's comfort level of one per cent of net demand and time liabilities. On Tuesday, banks borrowed Rs 1.23 lakh crore from the Reserve Bank of India (RBI) at 8.5 per cent.
Last fortnight, banks' repo borrowings increased, closing at Rs 2 lakh crore. This prompted RBI to announce a cut of 75 basis points in the cash reserve ratio (CRR) on March 9. The central bank is to release the mid-quarter review of monetary policy on Thursday.
Traders said CRR cut would help offset outflows on account of advance tax payments, not infuse additional liquidity. According to RBI, the 75-basis point cut in the CRR would release Rs 48,000 crore into the system. On the other hand, advance tax outflows are expected to be around Rs 50,000 crore.
A senior Union Bank of India official said he expected liquidity to improve next fortnight, as the pressure from advance tax payments fades. However, the demand for funds to meet year-end targets would keep the short-term rates high.