Credit growth slump, ample cash pull CD rates down to 5-year low

By: | Updated: August 8, 2015 1:16 AM

SLOW loan growth and ample liquidity with banks have dragged interest rates on certificate of deposits (CD) to nearly five-year lows.

SLOW loan growth and ample liquidity with banks have dragged interest rates on certificate of deposits (CD) to nearly five-year lows. While banks are reluctant to lower base rates, there has been transmission of the Reserve Bank of India’s repo cuts into rates in the money market.

CDs are money market instruments with maturities between seven days and one year through which banks borrow short-term funds.

NS Venkatesh, chief financial officer at IDBI Bank, observes that low credit offtake and a reasonable growth in deposit have contributed to the fall in CD rates, but adds the market is also witnessing a demand-supply mismatch.

“There is a huge demand from mutual funds as they are getting ample money supply from their liquid funds.

Compared to this, there are less issuances of CDs,” Venkatesh said. According to Bloomberg, Andhra Bank on Friday issued a three-month CD at 7.47% whereas it paid 8.5% for a CD of same tenure in January — marking a fall of at least 103 basis points in seven months of 2015. Twelve-month CD rates are also close to five-year lows at 7.92%.


Interestingly, one-month CDs are getting priced at 7.30%, just five basis points over the repo rate that currently stands at 7.25%.

With funds being available, lenders have not only reduced their CD issuances but are also holding back on rolling over the existing papers.

“Banks are issuing certificate of deposits, but the issuance volumes are less compared to a few months back. Also, they are not rolling over their CDs by the same proportion that used to happen earlier,” said Murthy Nagarajan, head-fixed Income at Quantum AMC.

The Reserve Bank of India has reduced the repo rate by a total of 75 basis points in 2015 so far. This shows that apart from the transmission of rate cuts to the money markets, a host of other factors have contributed to the fall in yields.

Mutual funds which are major investors in CDs are flush with liquidity at a time when banks are holding themselves back from issuing more of this short-term instrument. Adding to this is the slow credit offtake hovering in single digits at 9.65% and a deposit growth which, although modest at 11.75%, has left banks flush with funds.

Further, money market participants have indicated that the RBI is set to make a dividend payment to the government of R47,000 crore in the next few days. With government spending gaining momentum, the money is likely to make its way back to the markets, thereby keeping the liquidity position at extremely comfortable rates.

“The liquidity with the mutual fund industry is pretty comfortable as of now. Moreover, going forward you will have one more round of liquidity infusion from the Reserve Bank of India in terms of dividend payment to the government in the next few days,” Nagarajan added.

The overnight rates have also remained comparitively benign over the past few months. On Friday, the call rate stood at 7.12% where as the CBLO — a money market instrument using government securities as collateral — rate was at 6.78%.

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