The short-term certificates of deposit (CD) market has seen a spike in coupons with banks preferring to borrow only for the near term in the hope that interest rates will soften going forward. Banks are issuing CDs for a three-month tenure rather than borrowing for a longer term.

?Banks aren?t opting for longer-term CDs as they don’t want to lock in at higher rates at this point and so the majority of the issuances are for three-month maturities,? said TS Srinivasan, GM-treasury, Indian Overseas Bank (IOB).

Srinivasan points out that since demand for credit is slow, there is not too much pressure on banks to mobilise resources.

Parthasarathi Mukherjee, president treasury, Axis Bank adds: ?By December or January, interest rates could soften unless things deteriorate further on the inflation front. Banks that are raising money feel interest rates will be lower going ahead.?

Coupon rates on three-month CDs are now quoting in the region of 9.25%-9.3% having trended up by about 50 basis points over the past one month. ?With credit demand slowing, the preferred borrowing maturity bucket by corporates has shortened.

This could also be on the expectation that monetary tightening is going to end in the near future. Hence, spreads have narrowed while CD issuances at the short-end have increased,? said Mohan N Shenoi, Treasurer, Kotak Mahindra Bank.

The Reserve Bank of India (RBI) had increased the key repo rate by 50 basis points after reviewing monetary policy on July 26.

Since then, the coupon rate on CDs has been moving up gradually. However, the coupon rate on six-month CDs and one-year CDs has remained more or less stable at around 9.5% and 9.6% respectively.

As a result, the spread between the three-month and six-month paper has narrowed to 20 basis points from 80 basis points at the start of July. Also, the spread between the three-month and one-year paper has narrowed to 30 basis points from over 100 basis points, a month back.

On Tuesday, IOB raised R1,000 crore through 3-month CDs at 9.25% while Axis Bank has picked up R500 crore through a 3-month paper at a similar coupon rate.

?Since I can still save 20 or 30 basis points, I would prefer to not borrow at a higher interest of 9.6% because it?s possible that rates will lower in a few months,? says a banker.

With the demand for credit moderating, banks are issuing fewer CDs and the average daily borrowing has fallen to R1,500 – R2,000 crore from the R2,500 – R3,500 seen a quarter ago.