CD issuance on rise, as banks stare at liquidity shortage

With liquidity expected to tighten further, owing to the corporate advance tax outflow scheduled for mid-June, banks are seeking short-term funds. The issuance of certificates of deposits (CDs) rose, as rates peaked last week.

According to market sources, banks raised about Rs 16,000 crore through CDs in the week ended June 3, compared with Rs 7,000 crore in the week ended May 27 and Rs 3,500 crore in the week ended May 20.

“CD issuances have started picking up on concerns of liquidity shortage, as advance tax payments coincide with the demand at the end of the June quarter,” said a bond dealer with a public sector bank. A part of the funds was raised to redeem or rollover CDs issued earlier.

CD rates eased marginally, as investors took advantage of high levels. “CD issuances increased when the rates were close to the peak of around 9.80 per cent. Going ahead, it is expected the rates may fall by 50 basis points,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

CDs maturing in three months were issued at 9.65 per cent on Monday, while one-year CDs were issued at 10 per cent. Last week, banks had raised funds for three months at around 9.80 per cent, compared with 8.90 per cent a month ago. One-year CDs were raised at around 10.10 per cent last week, around 10 basis points higher compared to a month ago.

The lack of participation from mutual funds, which are major investors in bank CDs, was the primary factor that pushed up rates. On May 3, the Reserve Bank of India had mandated banks to limit their investments in liquid schemes to 10 per cent of their net worth. As a result, bank investments in mutual funds declined from Rs 1,20,854 crore as on May 6 to Rs 1,06,233 crore as on May 20.

According to estimates by analysts, advance tax outflows would be to the tune of Rs 30,000-35,000 crore, and this may further raise short-term rates. “There would be pressure on the yields at the shorter end, but it would be temporary,” said a treasury official of a public sector bank. “Further upward pressure on call rates is likely, as the Reserve Bank of India is expected to raise rates by another 25 basis points in the mid-quarterly review of the monetary policy.”

On an average, banks borrowed Rs 59,000 crore daily from the central bank's repo window in the last fortnight. On Monday, banks borrowed around Rs 75,000 crore from the repo window. Treasury officials expect the repo drawdown to touch Rs 1 lakh crore in the fortnight ending June 17, compared to RBI’s comfort zone of Rs 50,000 crore.

Adding pressure to short-term liquidity is the more-than-planned government borrowing through treasury and cash management bills. RBI had said it would auction Rs 11,000 crore of treasury bills on June 8.