Banks add Rs 8400 crore to deposits through CDs

Banks are making hay while the sun shines. They have added a whopping Rs 8,400 crore to their deposit base through certificates of deposit (CDs) issuances so far this month.

Today, banks placed CDs worth Rs 2,000 crore, the highest single-day volume this month.

Several banks are still queuing up in the short-term money market on fears rates will shoot up further.

Come September and rates are likely to rise sharply as advance tax outflows could tighten liquidity significantly, dealers said.

"We expect liquidity to tighten in September. So banks would not like to issue at higher rates. They are mopping up cash now," said a dealer with a large private bank.

Mutual funds, the biggest purchasers of such papers, expect rates to rise further by 20-25 basis points next month owing to tighter liquidity.

The advance tax outflows, estimated to be around Rs 30,000 crore, may prompt fund managers to tighten their purse strings as they expect redemptions in their liquid and debt funds.

Issuers are likely to face a rise in rates and slow down in demand at the shorter end of the curve once liquidity tightens, dealers said.

Banks are also getting ready for the higher credit growth that is usual in September owing to the start of festival season in the country, treasury officials said.

"September is usually the month of tight liquidity as credit grows faster because of the busy season. So most of banks' funds would be directed to loans rather than investments in mutual fund schemes and corporate bonds," said a fund manager at a private mutual fund.

The 3-month segment is the most popular as a slew of fixed income plans of similar maturities has been launched, dealers said.

Issuers also prefer the 3-month tenure, as "the main idea is to bridge any short-term mismatches in assets and liabilities. Basically banks want to tide over September period", said a dealer with another state-run bank.