Banks up CD issuance on fear that rate will rise

Primary issuances of certificates of deposit remained high On Thursday as banks rushed to raise funds in anticipation of a rise in CD rates next week as liquidity is seen shrinking, dealers said.

On Thursday, banks placed around Rs 3,500 crore of certificates of deposit (CDs), compared with Rs 3,300 crore on Monday. “Rates could rise further next week if liquidity tightens due to the advance tax payments,” said a dealer with a state-owned bank.

Most money market participants expect outflows towards advance tax payments to be around Rs 25,000 crore.

The huge supply of CDs pushed up rates 20 basis points On Thursday amid good demand from mutual funds.

Three-month CDs were quoted at 6.00-6.20 per cent compared with 5.70-5.90 per cent on Monday.

Three-month commercial papers were quoted at 9.40-9.55 per cent, unchanged from Monday.

“Mutual funds were holding on to cash since last week in the hope that rates would rise and so were investing in CDs On Thursday,” said a dealer with a mutual fund.

According to dealers, mutual funds also purchased CDs to fill the gap in their investment portfolios created by CDs that matured.

According to dealers, on Monday, SKS Micro Finance placed Rs 25 crore of one-year non-convertible debentures at 10.50 per cent.

Volumes were subdued as mutual funds invested heavily in the primary market, dealers said. On Thursday, CDs maturing in May were dealt at 5.60-5.70 per cent, unchanged from Monday.