 "Private bank's CD issuances to stay strong amid liquidity tightening")
Tight liquidity in the banking system is expected to keep interest rates elevated and may strengthen private banks' drive to issue certificates of deposits (CDs) for additional funds, according to India Ratings agency.
The Reserve Bank of India (RBI), in its August monetary policy review, asked banks to maintain an incremental cash reserve ratio (ICRR) of 10 per cent on the incremental net demand and time liabilities (NDTL) from August 12. The RBI had said it would review the liquidity-tightening step on or before September 8.
This step to suck out excess liquidity seems to have mopped up around Rs 1 trillion from the system (base money). As a consequence, the banking system liquidity receded to around 0.5 per cent of NDTL from an excess of average one per cent of NDTL. Subsequently short-term rates have moved up by 25-40 basis points.
As a measure to address the challenge of resources, private banks are issuing certificates of deposits (CDs), especially those with relatively less access to easy deposits. Public sector banks’ CD issuances sharply fell in August 2023 to Rs 14,800 crore (as of August 21, 2023 compared to Rs 34,600 crore in July 2023). Private banks raised around Rs 12,700 crore as of August 21, as against Rs 10,500 crore in July 2023.
Going by RBI data, liquidity has been under pressure through this week. It injected about Rs 15,552 crore in the system on August 22 and Rs 23,644 crore on August 21.
India Ratings said if the I-CRR requirement continues in September, tightness in the system liquidity will aggravate. The quarterly advance tax payments and monthly goods and service tax payments during the second and third week of September 2023 would create demand for additional funds. That trend will be temporary and the tightness will be critical to watch. The agency, therefore, expected the RBI to take a calibrated approach to withdraw the ICRR requirement starting September.