The Hindu Business Line : Yields on short-terms down as liquidity eases

Mumbai, March 27 The yields on short-term instruments, such as one-year fixed deposits, commercial paper and certificates of deposits have fallen in the last couple of days, due to the easing of liquidity conditions in the system and lower credit growth, said bank officials.

Mutual funds, which are the major investors in short-term instruments, on the other hand are finding themselves flush with funds and with fewer investment avenues.

The yield on a one-year certificate of deposit is between 9-9.25 per cent now, against 10 per cent earlier this month. Similarly, a one-year commercial paper of an NBFC, which was at 10.25 per cent has fallen to 9.35-9.45 per cent.

Banks not keen

As there are only three working days before the end of this fiscal, and as March 28 is reporting Friday, most banks do not want to hold onto excess funds, as it will reflect in their balance sheets.

As most of the banks have already completed what is known as ‘window dressing’, there is less demand for funds, said a senior bank official.

For instance, the rate on a one-year bulk fixed deposit was 10.5 per cent yesterday, but fell to 10.25 or by 25 basis points on Thursday, the official said.

“Banks have been overcautious this year and they have mobilised deposits in February itself. Call rates, which were at 30-40 per cent last year are as low as 4-4.5 per cent this year,” said a bond dealer at a private bank.

Net Interest Margins

Last year, most banks had experienced pressure on their Net Interest Margins as they raised bulk deposits at high interest rates to meet their balance sheet requirements. So, this year, they raised their deposits much earlier to avoid last minute rush, which would force them to offer very high deposit rates, explained a bank official.

The fixed income head at an asset management firm said that the rates on CDs and CPs have crashed because demand has outstripped supply. March is the month when mutual funds see a lot of their investments maturing.

“Mutual funds have waited to invest their surplus funds in anticipation of higher rates on short-term instruments at the end of the month. This meant that mutual funds are virtually scrambling for avenues to park their funds,” said the official

“Banks are not borrowing as much because credit growth is lower than deposit growth. Also, a number of banks have already completed with their Asset Liability Management,” he added.

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