Mumbai: One-year certificate of deposit (CD) rates at public-sector banks have risen above 8% in recent days, amid tight liquidity, elevated treasury-bill yields, and expectations of further increases in policy rates to help restrain inflation.
Comparable CD rates had fallen to around 6.6% in August, when FCNR(B) inflows left the banking system awash with liquidity.
Banking system liquidity moderated to a daily average surplus of ₹2.3 lakh crore in October, after a daily average of ₹7.7 lakh crore in September. This shortage of funds has increased demand for liquidity, prompting CD issuances to pick up.
Banks issued ₹19,505 crore CDs in the fortnight ending August 31. Issuances increased to ₹74,607 crore by September 30 and ₹45,781 crore by October 15, latest data shows.
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"CD rates are amongst other things a function of the underlying risk-free rate, which is the equivalent tenor T-bill. Rates of T-bills shot up 20-25 bps at the last auction and additionally there is demand coming in because of the liquidity squeeze," said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
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Yields on treasury bills-bonds with a tenure of less than one year- jumped to their highest level in nearly two years. The 364-day T-bill yield was at 6.69%, 20 basis points higher than its previous successful auction, RBI data showed. CD rates are priced at a spread from its corresponding T-bill rate.
"The increase in short term rates is not in isolation with just a liquidity deficit, this is also a function of rate hikes being priced in. The rate trajectory is skewed to the upper side and markets are preparing for a rate hike," said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
"Things are volatile, so I can say with some certainty that this is not the peak of CD rates," Tripathi said.
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Bank CD rates surge above 8% amid liquidity squeeze, rising T-Bill yields
Public-sector banks have recently increased one-year certificate of deposit rates beyond 8%, influenced by stricter liquidity and high treasury-bill yields. The reduction in banking liquidity has led to a noticeable rise in CD issuances lately. Observers predict further policy rate hikes to address inflation effectively, signaling that the current rates may not yet reflect their maximum potential…
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- Rozebud Gonsalves
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- The Economic Times
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