Short-term debt flows shifting from CPs to CDs on attractive returns

Rising CD yields and lower perceived risk draw investors away from CPs as banks ramp up short-term borrowings amid deposit tightness

Investors are moving away from the commercial paper (CP) market towards certificates of deposit (CDs), as primary CD issuances and rates on these short-term instruments rise. CDs are increasingly seen as more attractive on both risk and return, especially as banks tap the market to address deposit tightness in the system.

 

Outstanding CP issuances have declined by about ₹1 trillion since August 2025, while CD issuances have risen by a similar amount over the same period, up to the fortnight ended January 31, the latest data from the Reserve Bank of India (RBI) showed.

 

“Mutual funds have traditionally had a preference for CDs. With the surge in primary CD supply in January and February, it is natural to expect that they would have increased their allocations, especially since CDs are not only offering relatively higher yields but are also more liquid,” said Dhawal Dalal, president and chief investment officer, fixed income, at Edelweiss Asset Management.

 

“With credit growth remaining strong and retail deposit growth relatively weaker, banks have relied more on CDs to bridge the gap,” he added.

 

The outstanding amount of CDs rose to ₹5.8 trillion as of January 31, from ₹4.9 trillion at the end of the fortnight on August 22, 2025. Meanwhile, outstanding CPs fell to ₹4.3 trillion as of January 31, from ₹5.5 trillion at the end of the fortnight on August 15, 2024.

 

“The investor base for CPs and CDs is largely the same. The key differentiator is the nature of the borrower. CDs are primarily issued by banks, while CPs are largely issued by corporates. As a result, CDs typically carry lower perceived credit risk than CPs,” said Saurabh Bhalerao, associate director, banking, financial services and insurance, at CareEdge Ratings.

 

“With CD rates having moved up, investors are likely to find the combination of relatively lower credit risk and higher yields attractive, leading to a shift in flows towards the CD market. CPs, on the other hand, represent short-term borrowing by corporates, where banks remain highly competitive in extending short-term credit,” he added.

 

Banks’ reliance on CDs has increased in recent months, driven by a revival in credit demand and lagging deposit growth. Periods marked by a widening gap between credit and deposit growth have typically coincided with a rise in CD issuances.

 

Bank credit growth in the first fortnight of calendar year 2026 (ended January 15) slowed to 13.1 per cent year-on-year, while deposit growth eased to 10.6 per cent, RBI data showed. During the fortnight, credit contracted by ₹1.88 trillion, while deposits declined by ₹3.57 trillion.

 

Going forward, CD issuances are expected to maintain momentum as credit demand remains buoyant amid a supportive growth environment, while deposit mobilisation may continue to face pressure in a sticky interest rate backdrop.

 

“The increased competition for bank deposits has resulted in banks falling back on CDs, leading to a considerable pickup in the outstanding CD-to-deposit ratio. The evolution of system liquidity also shows directional convergence with CD issuances. Going forward, we expect CD issuances to continue their momentum on account of persistent robustness in credit demand,” a report by Bank of Baroda said.

 

Banks issued more than ₹1 trillion worth of CDs in the first 10 days of February after rates on the short-term debt instrument softened following liquidity infusion by the RBI.

 

Banks raised ₹1.21 trillion through CDs, compared with ₹1.48 trillion during the entire month of January, data from Prime Database showed. 

Gaining ground

• Outstanding CP issuances from August, 2025 till January 31, 2026 have dipped by ~ 1 trillion
• CD issuances have risen by a similar amount over the same period
• Primarily issued by banks, CDs carry lower credit risk compared to CPs
• On strong credit demand, CD issuances are likely to strengthen in the long term