Short-term rates remain stable due to RBI's liquidity infusion

Hover below 10% due to RBI's steps for liquidity infusion

Short-term rates, typically in double digits in March, have this time remained below 10 per cent due to liquidity infusing steps by the Reserve Bank of India (RBI).

Short-term rates include those of certificates of deposits (CDs) and commercial papers (CPs), and these are raised in tenures ranging from a month to a year. RBI has been actively infusing liquidity into the system through term repos. The central bank has also been conducting marginal standing facility (MSF) operations on Saturdays, though borrowing via MSF is more expensive than repo and term repo borrowings.

Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, said: “There has been sufficient liquidity in the system this time due to the term repos conducted by RBI. Besides that, the need for funds by banks and corporates have not been much due to slow credit growth and business growth."

According to issue arrangers, the recent issues of CDs include Bank of Maharashtra’s three-month instrument at 8.62 per cent, Punjab National Bank’s one-year issuance at 8.40 per cent and Canara Bank’s one-year instrument at 8.43 per cent. Recent CP issuances include the one-year issuance by Sundaram Finance at 8.80 per cent, Exim Bank’s three-month issuance and EID Parry’s two-month CP issuance at 8.94 per cent.  Suyash Choudhary, head-fixed income, IDFC Mutual Fund, said: “Earlier, we used to see credit growth of banks outspacing deposit growth, which is not the case anymore. The pressure on banks to raise funds through CDs is less. CPs are priced at spread over CDs. If CD rates are not spiking, even CPs’ are not rising.”

For the fortnight ended March 6, credit growth of the banking system grew 10 per cent year-on-year. During the period, the deposit growth was 11.62 per cent.

This time the bulk deposit rates of banks are lesser attractive than the CDs issued by them. Ramesh Rachuri, vice-president and head of fixed income at Peerless Funds Management Company, said: “We have seen bulk deposit rates going up in some banks. But compared to CD rates these are not that high. CDs are better priced for most banks. As a fund manager, why would I go and buy a bulk deposit which is at a lower rate and besides is not liquid?”

Earlier this month, RBI had cut the repo rate, or the rate at which banks borrow funds from the central bank, by 25 basis points. This was the second cut in the current calendar year. The first was in January. Due to the rate cut, short-term rates fell by 20-25 basis points immediately, making CDs and CPs cheaper for issuers.