CD issuances down; funds drawn to CBLO

CD issuances fall due to ample liquidity with banks

With issuances of certificates of deposits (CDs) drying up, mutual fund houses are deploying their funds in collateralised borrowing and lending obligation (CBLO). As a result, CBLO rates have been easing. On Thursday, the weighted average CBLO rate stood at 7.28 per cent, compared to 6.97 per cent on Wednesday.

“Since short-term instruments such as CDs are not issued much, fund houses are deploying their funds in CBLO. Also, they continue to deploy in selective commercial papers (CPs). But CDs are more liquid than CPs,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

While CDs are promissory notes issued by banks and are preferred by fund houses as short-term fund-raising instruments, CPs are short-term debt instruments issued by corporates for financing working capital loans.

CD issuances have dried up because currently, banks are sitting on ample liquidity. This follows banks converting the funds raised from the Reserve Bank of India (RBI)’s special dollar swap window and foreign borrowing into rupees. In a statement this week, RBI said the swap windows for foreign currency non-resident (bank) funds and banks’ foreign borrowings had mobilised $34 billion. The two facilities were closed on November 30.

Due to the substantial liquidity available with banks, they have been deploying funds in the call money market; owing to this, call money rates are also falling.

On Thursday, the weighed average call money rate stood at 7.11 per cent, compared to 7.06 per cent on Wednesday. Alok Singh, chief investment officer (fixed income), Bank of India AXA Mutual Fund, said overnight rates might not see a significant fall from current levels, as the deadline for paying the third instalment of corporate advance tax was approaching and this would lead to liquidity outflow. Usually, overnight rates rise during such times.