CD issuances fall on yearly deposit target breather

Issuances of certificates of deposits (CDs) fell on Monday, compared with last week, owing to lower demand from banks. According to traders, banks raised about to Rs 3,000 crore on Monday, against Rs 8,500 crore on Friday. The rates on the CDs also eased marginally.

CDs are short-term debt instruments issued by banks to raise funds for periods of up to one year.

Traders said there were flows from investors who feared banks may not have to raise deposits at high levels to achieve yearly targets - a parameter the government had dropped from the 'to do' list of public sector banks. As a result, short-term rates, which typically rise at the end of a financial year, may ease further.

Last week, high demand from banks and a lack of investor interest had driven rates on three-month CDs to 11.15 per cent --- a level last seen three years earlier. Banks, including Vijaya Bank, Oriental Bank of Commerce and Corporation Bank, raised three-month CDs at 10.80-10.90 per cent.

"CD rates may come off gradually, as public sector banks may not rush to meet yearly deposit targets now," said a bond dealer with a domestic brokerage. However, the rollover of CDs issued earlier and demand from other banks may limit the fall, the dealer added.

Mutual funds, which are major investors in the short-term debt instruments, also participated. A recent guideline by the Securities and Exchange Board of India on reducing the threshold on the mark-to-market norm on debt market instruments from 91 days to 60 days had kept mutual funds away last week. "Clarity is still awaited, though some participants think the norms would not affect the current financial year's books," said a fund manager at a mutual fund.

The lower liquidity demand was also reflected through the Reserve Bank of India's Liquidity Adjustment Facility. Today, banks borrowed Rs 1.1 lakh crore through this window, compared with Rs 1.7-1.9 lakh crore last week.

The liquidity environment is seen worsening, as the deadline of March 15 for advance tax payments draws closer. RBI deputy governor Subir Gokarn on Monday said the central bank was conscious of the impact advance tax outflows may have on liquidity.