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CP, CD rates harden amid tight liquidity conditions in the market

Certificate of Deposit rates increased by 20-30 basis points across tenures during the same period

Representative Image. Photo: iStock

Over the past two months, RBI has been heavily intervening in the forex market, and this has been a drain on INR liquidity. (File Image: iStock)

Anjali Kumari Mumbai

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Commercial paper (CP) rates have increased by 10-13 basis points (bps) across tenures in January so far, reflecting the impact of tightening liquidity in the market. The upward movement indicates that borrowers are facing higher costs to raise short-term funds as the availability of liquid funds remains constrained.
 
Certificate of deposit rates increased by 20-30 basis points across tenures during the same period.
 
“Durable liquidity conditions are currently very tight. Short-term CP and CD rates have also risen. CD rates have moved up by 25 basis points, now trading in the range of 7.40 per cent and 7.51 per cent, compared to the previous month's range of 7.10 per cent to 7.20 per cent. Additionally, incremental deposits are expected to fall below incremental credit in the coming days. This is largely due to the Reserve Bank of India (RBI) actively intervening, which is further tightening systemic liquidity,” said the treasury head at a private bank.
 
 
According to the latest data, the liquidity deficit hit Rs 2 trillion as the RBI, instead of rolling over the buy/sell swap payments, made payments for them as they matured, market participants said. Additionally, the RBI’s intervention in the rupee spot market to stem the depreciation of the domestic currency further strained system liquidity, they said. 
 
Over the past two months, the RBI has been heavily intervening in the forex market, and this has been a drain on rupee liquidity. According to Nomura's estimate, the total liquidity has dropped from Rs 4.6 trillion on September 27 to Rs 0.4 trillion on December 27, and total liquidity has likely fallen further since.
 
“The RBI would have to combine instruments-OMO purchase, buy-sell swaps and other measures to infuse liquidity. They can do a CRR cut if they want because the amount of liquidity they need to infuse is very large. So they have to spread it across instruments. It can't be done with one instrument,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. 

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First Published: Jan 12 2025 | 5:18 PM IST

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