Interest rates on CD, CP jump over 100 bps in a month

By: |
Mumbai | Published: May 23, 2018 2:10:46 AM

Anticipatory borrowing, slowing rate of growth in deposits and less lending by PSBs are contributing to the rate hike

interest rates, money, cashThe convenience factor apart, one reason for the high cash levels in the economy, observers say, is the high 18% GST on services, which is leading to more cash payments.

Interest rates on commercial paper (CP) and certificates of deposit (CD) have jumped more than 100 basis points over the past month.

While some of the increase appear to be on account of anticipatory borrowing, ahead of the Reserve Bank of India’s monetary policy review in early June, money market observers said that the slowing rate of growth in deposits and less lending by several public sector banks are also contributing to it.

In the last five fortnights, deposits have grown at an average pace of 6.96% year on year. Moreover, the currency with the public as on April 27 was a high Rs 18.24 lakh crore compared with `17.01 lakh crore on October 28, 2016.

The convenience factor apart, one reason for the high cash levels in the economy, observers say, is the high 18% GST on services, which is leading to more cash payments. It is surprising that money is becoming costlier at a time when liquidity should actually be easier since it is the lean season.

On April 17, HDFC issued a three-month CP at 7.15%. Just about a month later, on May 21, the mortgage player had to shell out about 8.15% – 100 bps more – for a paper with a similar tenor. Similarly, Tata Capital paid 7.33% for a three-month CP on April 17; on May 21, it paid 8.35% for a two-month CP.

South Indian Bank had issued a three-month CD at 6.95% on April 19 whereas it paid 7.9% for a similar tenor paper on May 18. Again, IDFC Bank paid 7.05% for a three-month CD on April 24 whereas it had paid 7.71% for a similar tenor paper on May 17.

Siddharth Chaudhary, senior fund manager (fixed income), Sundaram Mutual, said the system liquidity has dried up due to increase in the currency in circulation and the step up in sales of forex by RBI to support fall in the rupee.
Chaudhary said, in addition, the incremental credit-deposit ratio was on the rise at a time eleven of the banks are under prompt corrective action (PCA) facing lending restrictions.

This has left fewer banks and some NBFCs to meet the credit demand, pushing the rates up.

Eleven out of 21 PSU banks have been placed under PCA by the Reserve Bank of India. These banks together account for 30% of all deposits of state-owned lenders but their lending has been curtailed.

Of these, Dena Bank is restricted from lending altogether while Allahabad Bank must restrict expansion of risk-weighted assets. With most lenders choosing to stay away from companies that do not have a good rating, borrowers have been meeting their short-term funding requirements from the money market.

R Sivakumar, head of fixed income at Axis Mutual Fund, points out that most public sector banks have reduced their lending either due to regulatory reasons or due to risk aversion.

This has resulted in mutual funds buying CDs and CPs. “This has led to an increase in the CP rates over the last one month,” Sivakumar said.

He added that banks are parking the cash with the RBI repo window at a time when the credit demand for short-term capital is fairly high. “Some liquidity has come into the market with mutual funds picking up CDs and CPs”, Sivakumar said.

The rise in the cost of money may not hurt individuals immediately, as banks may not pass it on; banks started raising their marginal cost of funds rate in the last four months. Starting January, Axis Bank SBI, HDFC Bank, ICICI Bank, IDBI Bank and Punjab National Bank hiked rates, in what turned out to be the first series of rate increases since the MCLR framework was put in place.

However, non-banking financial companies (NBFC) could start passing on the higher cost of money to customers, if they want to protect their margins.

Given the inflation rising, RBI may consider a repo rate hike in the upcoming monetary policy. That might have prompted some companies to borrow early. “The market is witnessing some sort of anticipatory borrowing as companies are expecting a rate hike in the coming months,” Sivakumar said.

According to RBI data, Rs 8,350 crore worth of CDs were issued during the fortnight ended April 27, taking the outstanding to Rs 2 lakh crore. This is the lowest fortnightly CD issuance in almost 12 fortnights.

By Tushar Goenka & Bhavik Nair 

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1How to open BSBD account in SBI? All you need to know
2How should homebuyers cope up with increasing home finance costs?
3Why mutual fund SIPs work better than lump-sum investments? Here’s all you need to know