Banks are rushing to garner short-term funds through certificate of deposits (CDs) on the back to rising credit demand and sluggish deposit mobilisation. This has seen CD rates scaling higher as banks continue to rely on CDs to plug short-term funding gaps, as the market is witnessing sustained pressure on rates, despite recent 25 basis points (bps) monetary easing.
According to Bloomberg data, the three-month CD rates rose to an average of 6.11% this week, compared to 5.98% in November, underscoring the demand-supply mismatch.
With deposit growth slowing, banks have stepped up CD issuances to meet immediate liquidity needs. According to Reserve Bank of India (RBI) data, banks raised Rs 77,875 crore through CDs in the fortnight ended November 28, higher than Rs 54,949 crore in the previous fortnight. Outstanding issuances have now touched a new all-time high at Rs 5.70 lakh crore, highlighting the growing dependence on this short-term instrument.
Widening Gap
Abhishek Bisen, Head-Fixed Income, Kotak Mahindra AMC, said, “CD rates remain elevated because genuinely deployable liquidity is limited, curbing aggressive buying. Banks are scrambling for funds as deposit growth is weak and credit growth is high.” He added further that the decline in debt mutual fund inflows has also reduced the overall demand impacting CD rates.
Rate Hike Reality
For instance, Bank of Baroda issued three-month CD of Rs 150 crore at 6.05% on Friday compared to 5.90% level before the policy. While Bank of India raised Rs 600 crore through three-month CD at 6.09% on Thursday, according to data from Clearing Corporation of India Ltd (CCIL).
Treasury officials at state-owned banks caution that the system requires far more liquidity for smooth transmission of the rate cut. One treasury head projected that one-year CD rates, currently at 6.53%, could rise further to 6.80% in the fourth quarter if funding pressures persist.