The Hindu Business Line : Yields on certificates of deposits ease on comfortable liquidity

Mumbai, Nov. 24 The yields on certificates of deposits (CDs) issued by banks have eased in the last couple of days due to the comfortable liquidity with banks following the measures taken by the Reserve Bank of India.

Also, banks now prefer to invest in safe instruments instead of lending for the fear of rising defaults, which is also making CDs hot property now, said bank officials.

As on Friday last, a one-year CD was quoting at 10.3 per cent, against around 11-12 per cent a few days earlier.

According to the head of treasury of a south-based public sector bank , now liquidity is comfortable and there is not much credit offtake happening as corporates are unwilling to pay higher rates for loans. So, banks prefer to park the surplus in CDs, he said.

A CD, even at these levels, offers higher returns than reverse repo, which is at 6 per cent and call rates, which are between 6 and 7 per cent.

“Earlier, banks used to park surplus funds in the liquid fund schemes issued by mutual funds. But now they are not very comfortable with such schemes. So, they prefer to invest in CDs of public sector banks,” said a senior treasury official from a Mumbai-based public sector bank.

There is also demand for short-term assets, because most banks are facing an asset-liability mismatch at the shorter end. So, it makes sense to invest in CDs from the asset-liability management point of view as well, the official added.

Since MFs are now seeing inflows, after facing huge redemption pressure some time ago, they are also looking at CDs as a safe investment option, said the bank official. Some time ago, the same MFs had sold or pledged CDs with banks at huge discounts, to meet their redemption pressures. But now having launched fresh schemes, they want to invest in CDs as their investors are asking for it, said a bank official.

“CDs have become extremely transferable instruments and there is huge demand for them. Now banks can command the rates. Due to this, banks are able to raise money at cheaper rates,” he added.

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