Short-term rates likely to ease further

In the last few days rates of CDs & CPs eased and, in a few tenures have even fallen below 9% from levels above 10% in March

Short-term rates, which have eased significantly since March, might decline further in the next couple of months, owing to increased liquidity in the system due to government spending. Also, if the Reserve Bank of India (RBI) keeps buying dollars from the market, it will help infuse rupee liquidity into the system.



At the beginning of the financial year, issuances of short-term instruments such as certificate of deposits (CDs) and commercial papers (CPs) aren’t much. In the last few days, CD and CP rates have eased and, for a few tenures, fallen to less than nine per cent, against more than 10 per cent in March. The fall has been steeper in the case of shorter maturities.

Recently, State Bank of Travencore raised two-month CDs at 8.68 per cent; the rate was 9.75 per cent in March.

“Though a large amount of easing in short-term rates has already taken place, we could see further easing through two-three months. The fall could be of additional 15-25 basis points. For bank credit, the lean season is between April and September; during this period, the issuance of CDs also slows. If call rates anchor lower, that would be a benefit for bringing down short-term rates,” said Suyash Choudhary, head (fixed income), IDFC Mutual Fund.

RBI’s is trying to ensure the call money rate and the repo rate are close to each other. On Monday, the weighted average call money rate stood at 8.52 per cent, compared with 8.12 per cent on Friday. The repo rate is eight per cent.



According to the Street, the government typically spends Rs 75,000-1,00,000 crore between the week after tax collections and mid-April.

In the recent past, RBI has been aggressively buying dollars from the market to boost its foreign exchange reserves. During the week ended march 28, these reserves rose by a whopping $5.04 billion to $303.67 billion, RBI data showed. The dollar-buying infused rupee liquidity into the system.

“We may see easing of another 10-15 basis points when the government cash balances are spent. RBI has been accumulating forex assets. That has added to liquidity in the system. RBI might continue to accumulate forex assets; in that case, liquidity will improve further,” said R Sivakumar, head (fixed income and products), Axis Mutual Fund.

According to RBI data, the government’s cash balances with the central bank stood at Rs 53,425 crore as on March 28, compared with Rs 62,104 crore a week earlier.