Banks expect liquidity to remain tight till March-end.
Interest rates on certificates of deposits (CDs) have crossed the 10 per cent level for the first time this financial year, reflecting banks’ desperation to raise funds. According to dealers, IDBI Bank on Wednesday raised Rs 600 crore for one year at 10.05 per cent.
“The bank is rolling over CDs which are coming up for redemption at a higher rate (double digits),” said a senior IDBI Bank official. Liquidity was expected to remain tight this month and in March and so selective rollovers would helped the bank ensure availability of resources, the official said.
Dealers said there was a resistance for the rates to touch double digits. Since they have reached double digits, a section of the market says short-term rates may harden further. Such levels were seen for the last time in March 2010.
CDs maturing in three months are not far behind. Three-month CD rates on Wednesday reached 9.70-9.75 per cent. “These could go further up as liquidity is still tight,” said a treasury official of a state-run bank.
Dealers said Syndicate Bank raised Rs 425 crore for three months at 9.70 per cent and Vijaya Bank raised Rs 400 crore for three months at 9.75 per cent. Bank of Baroda issued a CD worth Rs 1,100 crore for four months at 9.77 per cent.
CDs are issued by banks to avail of funds for short tenures. According to the Reserve Bank of India (RBI) guidelines, the maturity period of CDs issued by banks should not be less than seven days and not more than one year.
Increasing demand for credit and weak deposit growth have led to a liquidity crunch in the banking industry. The latest RBI data show that as on January 14, credit growth was 23 per cent while deposits grew 16.4 per cent.
In its third quarter monetary policy review, RBI had raised concerns over deposit growth failing to keep pace with credit growth. To build up deposits to support loan growth, banks raised interest rates on deposits by 25 to 50 basis points after the policy. Last quarter, banks had raised deposit rates by 250 basis points.
