Banks raise Certificate of deposit by 20 bps in Oct to cater credit demand

Certificate of deposit (CD) rates have risen by over 20 basis points in October across various tenures. The spike is attributed to banks' efforts to raise funds to cater to the heightened credit demand during the festive season, coupled with existing tight liquidity conditions, according to market experts.

CDs, which are short-term debt instruments employed by banks to amass funds, have seen an uptick in rates. Specifically, the rates for 6-month and 1-year CDs have climbed by 21 basis points, while the 3-month CD rates have surged by 26 basis points in October.

Data from the Clearing Corporation of India Limited (CCIL) reveals that banks have floated CDs worth Rs 20,450 crore this month. In contrast, September witnessed CD issuances amounting to Rs 73,856 crore, marking the highest for the ongoing financial year.

A dealer from a primary dealership mentioned the surge in rates can be attributed to the festive season's credit demand. Furthermore, he highlighted that the prevailing tight liquidity conditions are prompting banks to expediently gather funds.

Recent trends indicate that the banking system's liquidity reverted to a deficit on Tuesday, following a brief recovery on Monday. The Reserve Bank of India (RBI) infused Rs 41,884 crore into the system on Tuesday. A state-owned bank dealer noted that this liquidity status, predominantly in deficit, is likely a result of RBI's intentions. He added that a slight improvement was observed owing to inflows related to government schemes.

This liquidity deficit has been evident since September 15, primarily due to outflows from advanced tax payments and GST settlements. On September 19, the liquidity deficit soared to nearly Rs 1.47 trillion, a pinnacle since January 29, 2020, when the shortfall reached Rs 3 trillion.

In related news, the cut-off yield on 182-day treasury bills increased by 4 basis points in the weekly auction. Meanwhile, the 91-day and 364-day T-bill saw a rise of 2 basis points. The respective cut-off yields for 91-day, 84-day, and 364-day t-bills were set at 6.88 per cent, 7.13 per cent, and 7.15 per cent on Wednesday.

A dealer from another state-owned bank stated that the cut-off was anticipated, considering that call rates are gravitating towards the marginal standing facility (MSF). He added that banks aim for a spread of 10-15 basis points when borrowing from the MSF window at a 6.75 per cent rate.

Post the announcement of the incremental cash reserve ratio (I-CRR) on August 10, the weighted average call rate has primarily surpassed the repo rate, which currently stands at 6.50 per cent. As of Wednesday, the weighted average call rate was 6.76 per cent, exhibiting a slight increase compared to the previous day.