Short-term rates rise, as banks shore up books

Short-term rates rose last week, as banks push loan growth to shore up their balance sheets and meet half-yearly targets. The interest rate on three-month certificates of deposit (CDs) rose by 15 basis points to 9.35 per cent in one week, according to Bloomberg data.

However, dealers said on Tuesday, only a few deals were struck, at 9.40 per cent and for three-month CDs.

Allahabad Bank on Tuesday raised Rs 135 crore through three-month CDs at 9.4 per cent, while Vijaya Bank raised Rs 50 crore for three-month CDs at 9.42 per cent. The one-year CD rate stood at around 9.70, a rise of 10 basis points in one week, according to dealers.

The rates also rose because liquidity conditions on Tuesday were tight, as banks borrowed nearly Rs 80,000 crore from Reserve Bank of India (RBI) through the repo window.

Though the demand for loans showed signs of a revival as the festive season kicks in, it is still considered lower compared to the previous financial year. According to RBI data, the growth in loans since April was 3.4 per cent, compared with 4.3 per cent during the same period last year. The growth in loans, on a year-on-year basis, was 20.4 per cent as on September 9.

The central bank has also scaled down its credit growth projections for the current financial year from 19 per cent to 18 per cent, amidst the series of rate rises.

Banks have also lowered their credit growth projections. Loan growth has been slow in the current financial year following successive rate increases by the central bank, which raised the key policy rates by 350 basis points since March 2010. The effective policy rate tightening was to an extent of 500 basis points.

According to Kunal Shah, managing dire-ctor, Derivium Tradition Securities (India), rates rose by 20-25 basis points in the last few weeks on CDs. “From the first week of October, the interest rate on CDs would ease by up to 30 basis points,” he said.

Due to the comfortable liquidity scenario and the lack of demand for short-term resources, rates have moved in a narrow band during the current financial year, except for occasional quarter-end spikes, data showed. Rates were stable despite a 150-basis point rise in policy rates by the central bank since April.

In the second quarter, three-month CD rates ranged between 8.40 per cent and nine per cent, as of the second week of September. Rates on three-month CDs rose above nine per cent since the beginning of the current fortnight.