Rising issuance of CPs, CDs likely to keep money market rates elevated

Increased issuances of commercial papers (CPs) and certificates of deposit (CDs) are likely to keep money market rates moderately elevated, following a decline of 40-60 basis points (bps) over the three months ending August, India Ratings said in a report.

Money market rates have remained stable this month, with moderate fluctuations of 5-10 bps, driven by system liquidity volatility caused by quarterly advance corporate tax payments and GST payments.

According to the report, fundraising by State-owned banks through CDs has gone up significantly, with these banks issuing Rs 97,900 crore worth of CDs in September (as of Sep 24), up from Rs 56,400 crore in August. Even private sector banks have shown strong momentum in issuing such instruments. These banks have issued Rs 27,000 crore worth of CDs, compared to Rs 23,900 crore in August.

 

This surge in CD issuances is driven by quarter-end reporting, as funds raised through CDs are included under aggregate deposits, the report highlighted. Additionally, banks are increasingly taking the CD route to raise funds to support their credit growth since deposit growth has been sluggish, with the Reserve Bank of India (RBI) repeatedly asking the banks to adopt innovative ways to mobilise deposits so that credit-deposit gap gets narrower.

Concurrently, CP issuances have gained traction ahead of the festive season, with non-banking financial companies (NBFCs) issuing CPs due to favourable financing conditions and increased demand for liability funding.

Total CP issuances remained stable, with corporates issuing CPs worth Rs 34,800 crore as of September 24, compared to Rs 52,400 crore in August, while NBFCs and housing finance companies (HFCs) issued papers worth Rs 61,200 crore, up from Rs 53,700 crore.

Meanwhile, domestic banking system liquidity remained in surplus mode through September 2024 (up to 24th), except for a few days due to quarterly advance corporate tax payments followed by monthly GST payments in the third week of the month.

The average daily net liquidity adjustment facility (LAF) balance stayed above Rs 1.5 trillion surplus during this period. The liquidity has been further bolstered by strong foreign portfolio investment (FPI) inflows, totalling $10.10 billion in September 2024 (up to 24th). Since June 2024, net FPI inflows into the equity and debt markets have reached $23.9 billion. Liquidity was in a surplus of Rs 44,337 crore, the latest RBI data showed.