Short-term debt rates fall despite tight liquidity

The interest rates on short-term debt instruments continued to fall, even as liquidity conditions worsened due to advance tax outflows in the past week.

According to market players, rates on certificates of deposits (CDs) and commercial papers (CPs) have fallen by at least 75-100 basis points since the beginning of this month.

Low demand from banks, renewed investor appetite and expectations of liquidity conditions improving from the next month contributed to the easing of interest rates. “Banks have shed bulk deposits, as credit offtake is low and there is no need to maintain high cost deposits,” said Pawan Bajaj, deputy general manager-treasury, Bank of India.

Credit growth has slowed in the first quarter of financial year 2011-12. Banks disbursed Rs 28,263 crore of loans in the fortnight ended June 3. Banks are also offering attractive rates on retail term deposits, which have reduced their dependency on bulk deposits. As a result, banks garnered deposits worth Rs 58,341 crore in the fortnight ended June 3.

 

Banks had raised a lot of funds through CDs in the last quarter of financial year 2010-11 to meet the year-end targets. These were due for redemption in the months of May and June 2011. “Banks did not roll over most of the CDs and, hence, they were redeemed thereby improving investors' liquidity,” said Bajaj.

According to the latest data by the Reserve Bank of India (RBI), banks issued CDs worth Rs 14,388 crore in the fortnight ended May 6, much lower than Rs 61,292 crore issued in the fortnight ended April 8.

Interest rates on commercial papers issued by corporate bodies also fell, as demand from investors improved. Rates fell by at least 75 basis points though volumes remained subdued.

The advance tax outflow of around Rs 31,000 crore had led liquidity shortage last week. Reflecting the pressure, repo borrowings also zoomed above Rs 1 lakh crore on Monday. On June 10, some banks also resorted to raising funds from the marginal standing facility at penal rate of 8.25 per cent to tide over the crunch. Today, banks borrowed Rs 97,970 crore from RBI's liquidity adjustment facility.

Liquidity conditions are expected to return to RBI's comfort level of Rs 50,000 crore in July on the back of redemptions of government bonds and cash management bills. A month from now, Rs 18,000 crore worth of cash management bills will be redeemed by the government.