CD rates cross 11% in a first since 2008 repo drawing at new high

Recent Sebi norms barring mutual funds from investing in CDs add to liquidity concerns

The lack of interest from investors and the year-end rush by banks have driven the rates on certificates of deposits (CDs) maturing in three months above 11 per cent, a level last seen in 2008.

According to market participants, lenders, including IDBI Bank, UCO Bank and Central Bank of India, have raised funds for three months through CDs at rates ranging between 11.1 per cent and 11.15 per cent. The rates stood at around 100 basis points lower in the corresponding period of the last financial year.

CDs are short-term debt instruments issued by banks to raise funds for up to one year, and mutual funds are major investors in these instruments. However, traders said norms introduced recently by markets regulator Securities and Exchange Board of India (Sebi) were preventing mutual funds from participating. This is evident from the fact that the volumes are low, despite banks willing to pay high rates.

“Banks are finding it difficult to lock deals even for Rs 200 crore. The volume in the market is small,” said T S Srinivasan, general manager (treasury), Indian Overseas Bank. He added if situation did not improve, the rates would rise further.

A month earlier, Sebi had decided to reduce the threshold for mark-to-market requirement on debt and money market securities of mutual funds from 91 days to 60 days. Hence, securities with maturity periods of more than 60 days would have to be valued at market prices.

Nirav Dalal, managing director (debt capital markets), YES Bank, said, “The demand for CDs is muted, as mark-to-market ramifications due to the recent Sebi guidelines are keeping mutual funds from investing in the money market. This is over and above the inherent systemic liquidity deficit of about Rs 1.5-1.6 lakh crore.”

Banks that have surplus liquidity and invest in CDs issued by other banks are not doing so, as this is the last month of the current financial year. Rather than deploying funds in the money market, these are seeking higher credit growth.

Today, banks borrowed a record Rs 1.91 lakh crore from the Reserve Bank of India (RBI) under the Liquidity Adjustment Facility. The liquidity deficit has been beyond the central bank’s comfort zone of Rs 60,000 crore, despite a cut of 50 basis points in the cash reserve ratio in January.

Tomorrow, RBI is slated to buy government bonds and infuse up to Rs 12,000 crore into the banking system. However, traders said this would not help boost liquidity, in spite of the fact that there is no government debt sale auction scheduled for tomorrow. So far this financial year, the central bank has infused close to Rs 1 lakh crore through open market operations.

“Liquidity is expected to improve if government spending increases,” said N S Venkatesh, head (treasury), IDBI Bank. He added typically, the government tends to spend unused allocated amounts towards the end of the financial year.

Banks are bracing up for withdrawal pressure from companies, as the advance tax payment deadline of March 15 approaches.

Markets expect the central bank to address systemic liquidity concerns by announcing another cut in the cash reserve ratio before the mid-quarter review of monetary policy, scheduled on March 15.