Rates on certificates of deposit (CDs) touched a one-year high as banks borrowed aggressively from the debt markets on Friday. Traders said CD issuances were close to Rs 5,000 crore against the usual daily quantum of around Rs 3,000 crore. CD rates for three months’ maturity were up about 25 basis points on Friday.
Private sector lenders such as ING Vysya Bank borrowed funds at 10.5 per cent for the period maturing on April 3, while public sector banks such as Canara Bank borrowed at 10.34 per cent for a three-month period. “Banks are borrowing aggressively in order to meet their year-end business targets,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. He expects rates to stay high till the end of the month.
Markets are expecting a cut in the cash reserve ratio on March 15, when the Reserve Bank of India (RBI) is slated to announce its mid-quarter policy review. Vivek Rajpal, India rates strategist at Nomura, said advance tax outflows of about Rs 60,000 crore would add pressure to liquidity conditions. “Currently, liquidity deficit is to the tune of Rs 1.4 lakh crore, which could worsen to Rs 1.8-2 lakh crore in the period between March 15-23,” said Rajpal.
While rates on three-month CDs were around 10.30-10.50 per cent, banks were able to borrow funds at 10.10-10.2 per cent for one-year maturity, reflecting higher demand for funds at the shorter end. M Narendra, chairman and managing director of Indian Overseas Bank, said along with credit demand, funds were also required to cover maturing bulk deposits.
“Typically, credit growth picks up in February-March each year,” said Narendra. He said additional working capital requirements were driving incremental credit demand.
Banks also borrowed heavily from the Reserve Bank of India (RBI) under the Liquidity Adjustment Facility (LAF). On Friday, repo borrowings through the LAF were Rs 1.65 lakh crore. The rates in the call money market also shot up to nine per cent, reflecting high demand.
Liquidity has been in deficit of around Rs 1.2 lakh crore daily, despite a 50-bp (basis point) cut in the cash reserve ratio by the RBI last month. The central bank has also been infusing liquidity of about Rs 8000-10,000 crore every week via bond purchases in open market operations. However, this is being offset by higher market borrowings of Rs 12,000-14,000 crore every week by the government. Traders say the RBI’s forex intervention in the forwards market in the November-December period may also be contributing to the tightness in rupee liquidity now. According to RBI data, the central bank intervened to the tune of $1.37 billion in December and $1.6 billion in November 2011.
