Investors buy 3-mth CDs on better rates

Investors purchased three-month certificates of deposit (CD) on Monday because the papers were more attractive following the sharp rise in rates this month, dealers said.

Rates on three-month papers have risen 70-90 basis points this month due to tight liquidity in the banking system.

On Monday, three-month certificates of deposit were quoted at 8.50-8.60 per cent, as against 8.40-8.55 per cent Friday, while three-month commercial papers were quoted at 8.60-8.80 per cent, unchanged from Friday.

Rates for the one-year tenure were 8.90-9.00 per cent, as against 8.85-8.95 per cent Friday.

The tight liquidity has led to banks borrowing huge amounts from the Reserve Bank of India’s repo window. On an average, this month banks have borrowed over a trillion rupees from the repo tender everyday.

 

The cash crunch is expected to worsen further next month owing to outflows towards advance tax payments by corporates.

Companies will pay the third instalment of advance tax, estimated to be around Rs 50000 crore, by mid-December.

“Inflows have been marginal and so most of the fund houses are keen on investing in shorter-tenure papers,” said a dealer with a mutual fund.

The spread between a three-month and one-year CD is just 30-40 bps, which is leading investors to buy shorter-tenure papers.