Issuance of certificates of deposit rose On Tuesday because banks increased their placements for refinancing redemption of CDs issued earlier, dealers said.
On Tuesday, banks placed around Rs 2,400 crore of certificates of deposit, compared with Rs 1,000 crore on Monday.
“Most of the banks’ papers were maturing during this period, so they were just refinancing their papers. Banks are also issuing papers as the rates on
CDs are much lower than their deposit rates,” said a dealer with a private bank.
Rates of such short-term papers, however, were unchanged, despite the rise in supply because demand was strong from mutual funds.
On Tuessday, three-month certificates of deposit were quoted at 6.25-6.75 per cent, unchanged from Monday.
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Fund houses have been keeping high cash holdings with them and were keen to invest in such papers, dealers with mutual funds said.
However, some mutual funds are still cautious on big investments in the last quarter of 2008-09 (April-March).
Mutual funds typically witness big redemption during March and therefore have to invest in assets to deploy inflows of their schemes much ahead of the financial year-end.
Therefore, fund managers are investing in papers maturing by March 15 only as redemption will squeeze liquidity thereafter, dealers said.
Also, most fund houses prefer to have a high amount of cash holding because of expected redemption.
“Only big mutual fund houses have invested in these short-term papers. They have been holding on to cash since a long time and found it the right time to invest,” said a dealer with a private mutual fund.
Three-month commercial papers were quoted around 10.00-10.50 per cent, steady from Monday.
Volume in secondary market fell as investors preferred to invest in long-term papers through primary market, dealers said.
“When primary market is so active, trade in secondary market is usually lacklustre,” said a dealer with a mutual fund.
On Tuesday, December maturity papers were dealt at 7.55-7.75 per cent, unchanged from Monday.