CD rates down on improved liquidity

In initial signs of easing liquidity, the rates on certificates of deposit (CDs) have cooled from 10 per cent levels.

“The rates have cooled because investors are more than issuers now,” said a treasury official with a large public sector bank.

Banks are now able to raise funds through CDs for three months at 9.65 per cent, as compared to 10.10 per cent a week ago. For CDs maturing in a year, the rates have come down to 9.85 per cent from 10.15 per cent.

Money that was flowing into bulk deposits has stopped, as most banks are not offering bulk deposits above card rates. “Those funds have been directed towards CDs as their rates are still attractive,” said a dealer from a brokerage firm. Last year, CD rates were around six per cent, he added.

Also, the supply of funds has improved on speculation that interest rates have peaked. “Foreign banks have also started investing in a big way as they expect CD rates to fall,” said the dealer.

Just a month down the line, credit demand will be subdued, reflecting early days into the new financial year. So would the pressure on banks to raise funds. The net effect of this is a softening of interest rates in the short-term money market.

“The impact of moderating food inflation and improving liquidity on the back of higher government spending will reflect across the interest rate spectrum. With yields softening at the longer end of the interest rate curve, the effect will be visible at the shorter end, too,” said M Narendra, chairman and managing director, Indian Overseas Bank.

Like foreign banks looking to park funds in instruments giving better returns, some corporate houses, especially large ones, have begun to pick CDs from the secondary market.

“Only a few large corporate houses with a strong treasury are active in this kind of transaction, especially at the close of the quarter,” said the head of a private bond house involved in structuring such deals. CDs are a surrogate for fixed deposits. An added advantage of CDs is they are more liquid, he added.

Banks have been raising funds heavily through bulk deposits and CDs to shore up deposits and meet their targets. There were concerns on deposit growth after banks received lukewarm response to the first round of the interest rate increase on retail deposits, while bank credit kept growing at a healthy pace. Following this, banks resorted to pushing retail deposit rates as high as 9.5 per cent.