CD rates rise on low investor appetite

The rates on certificates of deposits (CDs) across maturities have increased by at least 50 basis points in the last month, owing to tighter liquidity conditions and reduced investor appetite. As a result, one -year CD issuances have decreased and banks are now issuing more CDs for shorter tenures instead.

Currently, banks raise funds through CDs at around 9.2 per cent for 3-month maturities, around 9.65 per cent for 6-month maturities and around 10 per cent for 1-year maturities. According to market sources, banks that picked up short-term funds from the CD market in the past one month include HDFC Bank, Axis Bank, IDBI Bank, Punjab National Bank and Federal Bank.

“Liquidity conditions have tightened again, since the government borrowed more than earlier planned, through treasury bills and cash management bills,” said SP Prabhu, vice-president (fixed income), IDBI Federal Life Insurance.

While banks borrow close to Rs 60,000 crore everyday from the Reserve Bank of India (RBI) under the liquidity adjustment facility, the government borrows Rs 11,000 crore through treasury bills every week, compared with Rs 7,000 crore it had planned earlier.

RBI's mandate for banks to limit investments in liquid schemes of mutual funds has also hit the CD market. Mutual funds usually invest large sums in bank CDs. However, after the new RBI norm, banks would be keen to bring down their exposure to liquid schemes. “Banks have been given a period of six months. But most banks have an exposure much higher than their permissible limits,” said Prasanna Patankar, senior vice-president, STCI Primary Dealership. According to RBI data, bank investments in mutual funds stood at Rs 1.18 lakh crore as on April 22, 2011. The new norm permits banks to invest up to 10 per cent of their net worth in liquid schemes of mutual funds.

The majority of issuances this month are roll-overs of CDs issued in the last quarter of 2010-11. As on April 8, the outstanding amount on CDs rose to Rs 4.44 lakh crore from Rs 3.41 lakh crore a year ago.

Going forward, CD rates are expected to inch up further, as the flow from mutual funds continues to decline. “We expect CD rates to go up by 10-15 basis points. They would then stabilise, as banks may directly buy CDs if the credit growth remains slack,” said Patankar.