With just days left for the payment of advance taxes, short-term certificate of deposits (CD) rates have risen by 10-19 basis points in one day. CDs are money market instruments through which banks borrow short-term money with the tenure ranging between seven days and one year.
Bloomberg data show that IDBI Bank on Thursday issued two-month CDs at 7.65% and 7.70% while it had paid a yield of 7.51% for a similar tenure paper a day before.
Bloomberg data also show that Vijaya Bank had issued two-month CDs at 7.60% on Thursday while the public sector lender had paid 7.51% for a similar tenure paper on Wednesday. This shows a rise in CD yields by 10-19 basis points in a day.
Market participants attribute this sudden spike in rates to a combination of factors that include the approaching date for advance tax payment along with the FOMC meet next week that would decide the Fed’s course of action on the interest rates in the US.
“Three banks raised close to Rs 6,000 crore on Friday by issuing CDs. Since, the advance tax payment date is very close coupled with the fact that the much anticipated FOMC meet is scheduled next week, most investors want to hold on to cash. This might have pushed the yields higher,” a money market participant said.
Other segments of money markets have also been seeing some rise in the yields recently. On Wednesday, the collateralised borrowing and lending obligation (CBLO) rate had seen an intraday spike to levels as high as 8%. CBLO is a money market instrument that uses government securities as collateral.
“Since the CBLO rate rose in the intraday trade on Wednesday, the banks might have anticipated some sort of a rise in rates ahead. This might be the reason why CD yields at 7.70% might have been considered relatively attractive,” a broker said.
However, a fixed-income head of a mutual fund house stated that this hardening of yields can just be a one-off and if the rates remain at these levels over the next few days, a trend could be established.
“Banks have adequate liquidity. They might have been pro-active in anticipating the advance tax payments ahead but this cannot be the only reason. The sudden rise might be a one-off. We will have to wait and watch over the next few days to see where the yields are settling down,” the money market participant said.
This spike in the CD rates is quite in contrast to the trend seen over the past several months when money market rates had been falling due to a reduction in the repo rate by 75 basis points in calendar year 2015. Since January, yields on short-term CDs have fallen by at least 80-100 basis points if the recent spike is not taken into consideration.
If the US Federal Reserve decides to hike interest rates, yields are likely to harden for some time to come. Several market participants are also of the view that with inflation under control, the Reserve Bank of India (RBI) has room to cut rates in the September 29 monetary policy which would then act as a counter to any possible hardening of yields.
On Thursday, the call rate stood at 7.11% where as the CBLO rate stood at 7.37%.