Short-term rates ease as liquidity stays tight

Three-month certificates of deposit rate eases 75-80 basis points

Short-term rates have eased significantly as sluggish loan demand is expected during the early part of the new financial year.

According to dealers, rates on three-month certificates of deposit (CDs) have come down by 75-80 basis points (bps), while rates on one-year CDs have eased 25-30 basis points.

In the last week of March, rates of three-month CDs were hovering around nine per cent with banks like Punjab National Bank (PNB), United Bank of India and Vijaya Bank raising funds at 8.75-8.84 per cent. Yesterday, Oriental Bank of Commerce (OBC) raised funds via CDs maturing May 31 at 7.9 per cent, while Vijaya Bank issued CDs at 7.97 per cent, maturing on June 24.

Similarly, Bank of Maharashtra today issued one-year CD at 8.6 per cent. Despite a 25 basis-point rate cut by the Reserve Bank of India (RBI) during the mid-quarter review on March 19, banks were reluctant to cut interest rates to meet their year-end targets. However, on April 1, PNB and OBC reduced short-term retail deposit rates.

While PNB slashed the rates by up to 200 basis points, OBC reduced it by 25-50 basis points.

Liquidity, however, remained tight with banks borrowing around Rs 1 lakh crore from the repo window of RBI, which is above the central bank’s comfort zone of plus or minus one per cent of banks’ net time and demand liabilities or Rs 70,000 crore. Bankers expect the liquidity situation to ease once the government starts spending.

Banks expect rates to ease further by the middle of the month when the liquidity scenario improves. In addition, further rate easing by the central bank, during the annual policy review scheduled on May 3, will help banks lower interest rates.

“While short-term rates have started to fall, banks are still offering nine per cent for more than one-year deposit rates. Until those rates come down, it will be difficult for banks to cut lending rates,” said a senior official from a public sector bank.