By Manish M Suvarna
Issuances of certificates of deposit (CDs) rose sharply in November due to demand from private banks for the festival season. Issuances also surged in anticipation of short-term rates inching up after the monetary policy review.
According to data compiled from NSDL, banks raised Rs 14,020 crore in November, sharply higher than Rs 425 crore in October. In September, banks had raised Rs 12,735 crore. Axis Bank was the largest issuer in November at Rs 9,630 crore. This was followed by HDFC Bank which raised Rs 3,550 crore. However, state-owned banks remained on the sidelines with no issuances from their end.
“We believe that some banks have issued CDs in anticipation of short-term rates going up even though liquidity continues to be in surplus. It is a function of future expectations in our view. Also the spreads between 1-year T-bill and CDs are close to historically low levels, which may not sustain going forward. Hence, banks are taking advantage of the same,” said Puneet Pal, head – fixed income, PGIM India Mutual Fund.
Market participants said issuances also surged because few banks have tapped the market to roll over their papers, instead of redemption. Usually, banks roll over their papers to get better rates in the low-interest rate scenario.
On the other hand, credit offtake in November increased due to festival-time demand for retail loans. The credit growth was also supported by easing of lockdown restrictions.
CARE Ratings expects the bank credit growth to be in the range of 7.5% to 8% in FY22 with a low base effect, economic expansion and extended ECLGS support. “Retail segment is expected to do well, compared with the industry and service segments,” it said in a report.
The rates on CDs showed an upward movement as of November 30 due to VRRR auctions conducted by the central bank and a higher cut-off being set at the auction. By the end of November, the rates on these instruments were in the range of 3.50% to 3.80%.
Dealers expect rates on commercial papers and CDs to rise in coming days after the central bank increased the amount of VRRR auctions in December. “We expect short-term rates to inch higher gradually as the RBI starts to absorb not only higher amounts under VRRR, but also indicating that the 14-day VRRR will be the main instrument of liquidity absorption from January onwards,” Pal said.