RBI's liquidity withdrawal pushes bank CD issuances to 3-month high

The Reserve Bank of India's move to withdraw liquidity from the banking system has forced lenders to scout the market for funds, pushing up the issuances of certificates of deposits (CDs) to a three-month high for the previous fortnight.

Banks raised over 350 billion rupees ($4.24 billion) via CDs in the fortnight ended Aug. 25, data from CCIL's F-Trac platform showed.

That is the highest since the two weeks ended May 19, or before the central bank withdrew the highest level currency notes.

"Most banks were caught by surprise with that move and have little option but to rely on market funding and are preferring CDs instead of going for overnight borrowing on a daily basis," a senior treasury official at a state-run bank said.

Earlier this month, the RBI had mandated that banks maintain an additional 10% cash reserve ratio for any increase in deposits between May 19 and July 28, and this led to withdrawals of over one trillion rupees from the banking system.

That, along with tax outflows, pushed the banking system liquidity into deficit for last week for the first time this financial year.Of the total, private lenders raised around 162 billion rupees via CDs, with HDFC Bank leading the pack.

Following a merger with HDFC Ltd, the bank has been raising more funds via bulk deposits from the market.State-run lenders raised around 189 billion rupees, led by Canara Bank.HDFC Bank and Canara Bank did not respond to a Reuters email seeking comment.

"There is also a pick up in credit, which has led banks to turn to CD market for fundraising," said VRC Reddy, treasury head of Karur Vysya Bank.

Credit demand in India typically picks up from September.Meanwhile, interest rates on these shorter tenor instruments also rose to a near four-month high.

However, it still makes sense for the banks to raise the shortfall via CDs instead of hiking fixed deposit rates, which would have a more long-term impact, said Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap said.