Rates on short-term debt instruments inched closer to three-year high levels as liquidity tightened a day ahead of the advance tax payment deadline.
According to market participants, South Indian Bank raised Rs 400 crore via certificates of deposit (CDs) for three months at 11.75 per cent. In 2008, the rates on three-month CDs had crossed 12 per cent. CDs are short-term debt instruments issued by banks to raise funds for a year.
A structural liquidity deficit, coupled with seasonal demand for funds, have led to a surge in short-term debt rates. "There is panic from banks to meet huge deposit maturities lined up by cash rich entities for spike in term money rates," said Moses Harding, head, economic & market research, IndusInd Bank.
Banks continue to daily borrow Rs 1.2-1.3 lakh crore from the Reserve Bank of India (RBI), despite the reduction of 75 basis points in cash reserve ratio delivered by the central bank last week. "The measure would help to offset the impact of advance tax outflows rather than infuse additional liquidity," said a senior treasury official of a public sector bank.
RBI said the step would release Rs 48,000 crore worth of banks' funds into the system. Analysts expect outflows of about Rs 50,000 crore on account of advance tax payments.
Mutual funds are the major investors in CDs, but recent guidelines issued by the capital market regulator and redemption pressure is keeping them from investing aggressively. The new norms require mutual funds to mark-to-market any debt investment with maturities above 60 days.
The yields on the short term government debt are also nearing the peak seen in 2008. Today, yields on the three month treasury bills were at 8.9 per cent. In July 2008, the yields on the three month treasury bills had peaked at 9.25 per cent.
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The surge in treasury bill yields can also be attributed to high supply. According to RBI data, the total dues on treasury bills was Rs 51,590 crore, higher by Rs 24,790 crore as compared to the amount at the end of 2010-11.
More, the government also borrowed heavily via cash management bills citing temporary cash flow mismatches. So far this financial year, the government has raised Rs 73,000 crore through sale of cash management bills. This increased the pressure in short-term liquidity thereby driving rates up.