The Hindu Business Line : Certificates of deposit rates crash to 8%

Bankers anticipate a tightening of liquidity and point out that the entire reverse repo bids came from just 20 banks, indicating a concentration of liquidity.

C. Shivkumar

Bangalore, Aug. 7 With the financial markets inundated with liquidity, certificates of deposits (CD) have crashed to 8 per cent, lower than one-year retail deposit rates. Till May, rates on CDs were as high as 11.5 per cent, due to tight liquidity conditions.

With the conditions reversing now, there are few takers for CDs. CD issues for the fortnight ended June 8 was Rs 5,914 crore. But by the second fortnight CD issues had come down to Rs 4,864 crore.

Currently, bankers said the issues were barely about Rs 3,000 crore. A banker said, “Where is the need for CDs when there is abundant short-term liquidity in the market?”

Bankers said that one of the major factors for the drop in CD issues was the sudden dip in call rates.

Call money rates, for instance, is currently in the region of 6.1 per cent, up from the sub-one per cent level before the RBI hiked the cash reserve ratio (CRR) to 7 per cent effective. The message in the CRR hike was that banks contain their high cost liabilities.

The CRR hike had raised the cost of CDs as these instruments were part of the net demand and time liabilities. The liquidity overhang in the market was evident from the recourse to the reverse repurchase window after the cap of Rs 3,000 crore was removed. At the week’s first liquidity adjustment facility auction after the RBI’s norms came into effect, banks’ recourse to the reverse repo window was Rs 52,070 crore.

At Tuesday’s auctions, recourse to the reverse repo window was down to Rs 42,000 crore.

Bankers said short-term resources in the form of CDs and bulk deposits were raised in the past for funding asset growth at a time when credit was growing at close to 30 per cent. But credit growth had considerably slowed down since the beginning of this financial year. Year-on-year credit growth was barely about 23 per cent for most banks.

Deposit accretion

Accretion in deposits was close to 25 per cent and was still accelerating. Accretions were in the current and savings deposits that are treated as low cost and long-term retail deposits.

The accretions have prompted several banks to cut back on one-year term deposit rates.

But many banks preferred to wait before cutting back deposit rates. This was because of the anticipated tightening of liquidity.

Bankers pointed out that the entire reverse repo bids came from just 20 banks, indicating a concentration of liquidity.

Bankers, as a result anticipate, a reversal of liquidity overhang. HDFC’s Bank’s Chief Economist Mr Abheek Barua said, “The possibility of liquidity tightening is very strong when the seasonal effect kicks in and foreign flows slow down due to the sub-prime crisis.”