Elevated market borrowing rates are expected to pressure banks’ cost of funds in the January-March quarter, said bankers and analysts. Outpacing credit growth and lagging deposits have driven banks to heavily tap certificate of deposits (CD) since the third quarter, with some aggressively pursuing market-linked institutional deposits as well.
The higher supply pushed up the rates higher, making funding expensive for banks to meet the credit demand. The one-year CD rate rose 68 bps to 7.39% since January, while one-month CD increased 195 bps to 8.17%, according to Bloomberg. Higher funding costs are emerging despite the central bank’s 125 bps rate cuts over the past year. The one-year CD to Treasury bill spread has hit historical highs of 167 bps, versus the typical 70-90 bps range.
According to a senior banking official with a public sector bank, CD rates spike seasonally every January-March quarter, but it starts from February. This year it hit early in January—reaching 7%. “Bulk deposit rates from corporates, trusts, and others have also surged significantly by 30 bps above CDs,” he added.
What do analysts at ICRA say?
“The recent firming-up of certificate of deposit yields amid geopolitical uncertainties, coupled with persistent challenges in deposit mobilisation, is exerting upward pressure on funding costs,” said Sachin Sachdeva, vice president & sector head – financial sector ratings, ICRA.
He explained that Q4 will reflect the full‑quarter impact of the rate cut undertaken in December 2025. Consequently, net interest margins are expected to stay under pressure in Q4.
According to a recent report by Nomura, the persistence of elevated G-sec yields, rising CD issuances, and increasing CD yields indicates that funding conditions remain tight at the margin despite policy easing. It added that, in this environment, liability franchise strength – not liquidity availability – will drive margin outcomes, leading to greater divergence across banks.
As a result, Nomura has revised NIM projections downwards for banks due to moderation in current account, savings account (CASA) deposits and higher funding costs. “We were building in NIM improvement from 4QFY26 onwards for most banks; this is now likely to be delayed into 2HFY27, with the pace of recovery more gradual,” the report said.
Banks raised Rs 1.08 lakh crore through CDs
Banks raised Rs 1.08 lakh crore through CDs for the fortnight ended March 15, taking the outstanding issuances to a record Rs 6.79 lakh crore, the Reserve Bank of India (RBI) data showed.
The gap between credit and growth widened to 260 basis points (bps) compared to an average of 171 bps during October-December. Bank credit grew 14.5%, while deposits rose 11.9% as of February 28, as per latest RBI data. Consequently, credit–deposit ratio jumped to a multi‑decadal high of 82.39%.
Despite the central bank’s proactive liquidity injections via tools like bond purchases through open market operations (OMO) and variable rate repo auctions (VRR), liquidity remains tight and it could not bring down CD rates.
“Though the transmission push has been consistent, the cost of deposit has started to rise for banks, making it one of the shortest rate cut cycles,” said a senior official at a state-owned bank.
Another public sector banker said that banks’ blended deposit costs, including CDs and bulk, have jumped 30-40 bps from Q3, with short-term CD rates now exceeding long-term ones in a sharp inversion.
While bankers anticipate rates to ease next quarter on account of government spending, they highlighted a severe structural shift in banking as deposits migrate to higher-yielding alternatives. It urged the need for developing other sources for funding.