Interest rates on certificates of deposit (CDs), which had softened in previous weeks, might be headed upwards again with Rs 60,000 crore of paper due for maturity in September, according to money market dealers.
However, the rate for one-year paper is unlikely to cross the eight per cent level in the near-term.
CDs are money market instruments issued by lending institutions to meet their short-term funding needs.
Around Rs 60,000 crore of CDs are coming up for maturity in September, a bulk of which is likely to be rolled over. Around Rs 10,000 crore has already been rolled over since the beginning of September, according to money market dealers.
The rate on a three-month CD has already hardened to seven per cent from 6.85 per cent last week. Post the Reserve Bank of India’s (RBI’s) credit policy review, the rate had hardened to 7.25 per cent.
CD issuances and roll-overs by banks usually rise in March and September since banks typically load up on cash to bloat their assets before closing their books for the reporting period. Mutual funds, typically the biggest investors in these instruments, kept away during this period to ensure that they had enough cash on hand to meet redemptions for advance tax payments.
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However, this year, the situation is accentuated by a tight liquidity scenario. “Liquidity is in deficit mode and is likely to remain at the upper-end of the corridor. This might put further pressure on CD rates,” said R Arun Kumar, vice-president, fixed income division at Nomura Capital.
Most banks have already increased retail deposit rates by as much as 150 basis points (bps) after RBI raised policy rates in its July 27 monetary policy review.
The next monetary policy review is due on September 16 and industry insiders expect a further raise of at least 150 bps.
While CD rates are set to rise, commercial paper (CP) rates have softened over the past few days on fewer incremental issuances. Three-month CP rates have softened to 6.9 to seven per cent from 7.6-7.7 per cent two weeks back.