Short-term rates up, as banks raise funds

With offtake improving across sectors and banks gearing up to meet credit targets, interest rates cross 10%

Interest rates on short-term debt instruments touched double digits on Thursday, as banks raised funds to meet credit growth targets in the last quarter of the current financial year. According to market participants, rates on certificates of deposit (CDs) issued by banks crossed 10 per cent on Thursday.

“Credit pick-up is improving across sectors and most of it is to meet working capital requirements,” said Ashok Dutt, executive director, Dena Bank. According to Reserve Bank of India (RBI) data, credit growth declined to 15.9 per cent at the end of the third quarter. To achieve RBI’s projection of 18 per cent credit growth, banks need to disburse about Rs 2.8 lakh crore in the last three months of 2011-12.

Among banks that raised funds at 10.05 per cent through CDs maturing in a year were Axis Bank, Vijaya Bank and Dena Bank. Rates had briefly touched double digits in June, and have ranged between 9 and 9.5 per cent since then.

Banks and mutual funds are major investors in short-term money market instruments. A revival in credit offtake is also a reason why banks with surplus liquidity have diverted funds from money market lending, resulting in upward pressure on short-term rates. On the other hand, mutual funds have recorded a lack of fresh flows.

Typically, banks and corporate bodies withdraw funds from mutual funds towards the end of a quarter, and such funds take about a month to find their way back into the system. According to RBI data, banks withdrew Rs 22,300 crore from mutual funds in the fortnight ended December 30. However, according to a new norm, banks are not permitted to invest more than 10 per cent of their net worth in liquid schemes of mutual funds. Banks’ investments in mutual funds are unlikely to see any sharp rise, as the deadline to abide by the new norm expired in December.

“Liquidity is tight, and there are no buyers for CDs,” said K Ramanathan, head (fixed income and structured products), ING Mutual Fund. Since the past week, banks have been borrowing an average of Rs 1.46 lakh crore daily from RBI’s repo window under the liquidity adjustment facility. Call money rates had also touched 10 per cent a week ago, reflecting the tight liquidity conditions. Early this week, banks had tapped the marginal standing facility window to raise Rs 200 crore at 9.5 per cent.

Several rounds of bond purchases by RBI through open market operations (OMOs) have helped keep a check on yields at the longer end. So far, RBI has infused about Rs 60,000 crore through OMOs to support the government’s higher-than-planned market borrowing plan. The central bank is scheduled to sell Rs 14,000 crore of government securities and buy Rs 12,000 crore of government debt tomorrow.

Short-term rates are expected to remain high in the absence of any monetary-easing measures by the central bank. “Short-term rates may cool once RBI decides to cut policy rates or infuse liquidity through a cut in the cash reserve ratio,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. Currently, the repo rate is 8.5 per cent, and this would be reviewed by RBI on January 24.