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As issuances of Certificate of Deposits (CDs) are drying up, mutual fund houses are deploying their funds in Collateralized Borrowing and Lending Obligation (CBLO). The resulting effect is that CBLO rates have been easilng.
The Weighted Average Rate (WAR) of CBLO on Wednesday stood at 6.97% compared with 7.10% on Tuesday.
CDs are promissory notes issued by banks and are short-term instruments of fund raising. They are preferred short-term investment instruments by fund houses.
“Since short-term instruments like CDs are not issued much, fund houses are deploying their funds in CBLO. Fund house continue to deploy also in selective Commercial Papers (CPs). But CDs are more liquid than CPs,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund. CPs are short-term debt instruments issued by corporates for financing working capital loans.
CD issuances dried up because banks are currently sitting on ample liquidity. Liquidity got a boost because banks converted the funds raised from the Reserve Bank of India's (RBI) special dollar swap window and overseas borrowing into rupees. RBI said in a press statement this week that the swap windows for Foreign Currency Non-Resident (Banks) or FCNR (B) funds and banks' overseas borrowings has mobilised $ 34 billion. The two facilities were closed on November 30 by RBI.
In fact due to ample liquidity available with banks, they have been deploying funds in the call money market as a result of which call money rates are also easing. The WAR call money rate stood at 7.06% on Wednesday compared with 7.21% on Tuesday.
Overnight rates are generally very low on Saturdays because of thin trades. But on weekdays they inch up. The recent fall in overnight rates is attributed to comfortable liquidity with banks.
But according to Alok Singh, chief investment officer (fixed income), BOI AXA Mutual Fund overnight rates may not ease significantly from current levels. This is because the deadline for the payment of third installment of corporate advance tax is nearing due to which liquidity outflow will happen. Overnight rates typically rise during such times.
