CD rates seen above 10% this week

The interest rates on certificates of deposits (CDs) in one-year segment may rise above 10 per cent this week. Last week, they were at 9.40-9.90 per cent.

“The difference in interest rates of three-month segment and one-year segment is 40 to 50 basis points. Hence, it makes more sense to go for the longer tenure,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

The liquidity is expected to ease only after March 2011, when government starts spending in the first week of the new financial year.

The Reserve Bank of India (RBI) said in its third quarter review of monetary policy that it had done all it could to ease liquidity and now the situation would ease only when government started spending.

As on January 14, the government's cash surplus with RBI stood at Rs 64,390 crore.

Banks are in dire need for deposits and RBI has raised concerns on the widening gap between these and advances. Following RBI’s directive to cut this gap, banks will try their best to raise enough deposits to keep funding credit demand.

Last week, the drawdown from RBI’s repo window was above Rs 1 lakh crore, owing to rate rise speculations. January 31 marks the beginning of a new reporting fortnight, when banks tend to shore up adequate funds to meet regulatory requirements.

“Otherwise, liquidity is expected to be better than the previous weeks, given that liquidity measures have been extended,” said a treasury official from a public sector bank.

RBI raised the key policy rates by 25 basis points each in its third quarter monetary policy review. The rate at which banks borrow from RBI, the repo rate, now stands at 6.50 per cent, while the rate at which banks park their surplus with RBI, the reverse repo rate, is at 5.50 per cent. RBI also extended the leeway of one per cent in Statutory Liquidity Ratio for banks till April 8.