Short-term rates fall on hopes of rate cut

The rates on short-term debt instruments like certificates of deposits (CDs) and commercial papers (CPs) have fallen by 25-30 basis points across tenures, as markets expect reduction in policy rate this month. The Reserve Bank of India (RBI) is expected to cut policy rates by at least 25 basis points in the mid-quarter review scheduled on June 18.

“With crude softening and slowdown in economic growth, it is almost certain that the central bank will go ahead with a rate cut in next policy review,” said Ajay Manglunia, executive vice president with Edelweiss Securities.

Since the start of this month, rates on CDs maturing in three months and a year have fallen by 25-30 bps to 9.23 per cent and 9.75 per cent respectively. CDs are debt papers issued by banks to raise funds for tenures up to one year.

Also contributing to fall in CD rates is an improvement in liquidity conditions, leading to fewer issuances by banks. According to RBI data, banks borrowing from repo window has reduced to Rs 70,000-80,000 crore this week from above Rs 1 lakh crore a fortnight ago.

“Credit growth is muted, and there has been good flow in retail deposits,” said a senior treasury official from a large public sector bank. “So the need for short term funds has reduced.”

In fact, the country’s largest lender, the State Bank of India, today lowered interest rates on short term retail deposits by 25 bps citing better liquidity conditions.

Rates on CPs also eased by similar quantum on reduced demand and better investor appetite. CPs maturing in a year were issued at 9.85 per cent today as compared to 10 per cent levels a week ago. Going forward, short-term rates are expected to stay at current levels until the central bank announces the mid-quarter policy review.

Upasna Bhardwaj, economist at ING, now expects a rate cut of 25 bps as against the earlier view of a pause. “We now expect a 25 bps rate cut in the forthcoming meeting given that since the April policy meeting, the risks have increased on account of bleak global and domestic growth prospects and intensification of the European debt crisis,” she said in a report. Also, substantial easing of crude oil prices and easing core inflation has provided some room for further monetary easing, she added.