 "CDs continue to remain elevated amid high supply")
Despite liquidity situation in central bank's comfort zone, rates of Certificate of Deposits (CDs) have remained elevated amid high supply of CDs before the end of the first quarter.
CDs are promissory note issued by banks and are short-term instruments of fund raising. The 3-month CD rates are currently at 8.18%, 6-month at 8.25% and 1 year at 8.38%.
While average borrowing under Reserve Bank of India's liquidity adjustment facility stood at about Rs 85,000 crore since April. This is slightly above RBI's comfort zone of +/- 1% of Net Demand and Time Liabilities (NDTL).
The demand for CDs has also come down resulting in rates being elevated. “Money is moving away from short-end to longer duration funds due to which incremental requirement for CDs is less. Due to advance tax related outflows and quarter-end redemptions mutual funds are playing slightly safer. Their demand for CDs is lesser,” said Dhawal Dalal, executive vice-president and head of fixed income at DSP BlackRock Mutual Fund.
However, the rates will start easing once June ends and a new quarter begins. “ CD rates may ease by 25-30 basis points up to 3 month and longer-tenure CD rates may ease by 15-20 basis points,” said Dalal.
According to few experts RBI may cut the Cash Reserve Ratio (CRR) further on Monday due to which liquidity available with the banks will improve and cost of funds will come down. “ If there is a CRR cut then CD rates will come down by July,” said Arvind Chari, senior fund manager (fixed income), Quantum Mutual Fund. Chari is expecting RBI to cut the CRR by 50 basis points on Monday.
CRR is the proportion of total deposits a bank has to keep with RBI as cash. The CRR is 4% of banks NDTL. Since January 2012 the CRR has been cut by 200 basis points.
CDs are promissory note issued by banks and are short-term instruments of fund raising. The 3-month CD rates are currently at 8.18%, 6-month at 8.25% and 1 year at 8.38%.
While average borrowing under Reserve Bank of India's liquidity adjustment facility stood at about Rs 85,000 crore since April. This is slightly above RBI's comfort zone of +/- 1% of Net Demand and Time Liabilities (NDTL).
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g CD rates are high because of first installment of corporate advance tax deadline on June 15. There is outflow towards advance tax which is estimated at about Rs 30,000-40,000 crore. There are also 3-month CD maturing in June and there will be repricing of these CDs,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. According to Manglunia this time there was not much appetite for longer tenure CDs in March due to which majority of the issuances were in 3-month CDs.
The demand for CDs has also come down resulting in rates being elevated. “Money is moving away from short-end to longer duration funds due to which incremental requirement for CDs is less. Due to advance tax related outflows and quarter-end redemptions mutual funds are playing slightly safer. Their demand for CDs is lesser,” said Dhawal Dalal, executive vice-president and head of fixed income at DSP BlackRock Mutual Fund.
However, the rates will start easing once June ends and a new quarter begins. “ CD rates may ease by 25-30 basis points up to 3 month and longer-tenure CD rates may ease by 15-20 basis points,” said Dalal.
According to few experts RBI may cut the Cash Reserve Ratio (CRR) further on Monday due to which liquidity available with the banks will improve and cost of funds will come down. “ If there is a CRR cut then CD rates will come down by July,” said Arvind Chari, senior fund manager (fixed income), Quantum Mutual Fund. Chari is expecting RBI to cut the CRR by 50 basis points on Monday.
CRR is the proportion of total deposits a bank has to keep with RBI as cash. The CRR is 4% of banks NDTL. Since January 2012 the CRR has been cut by 200 basis points.