The Hindu Business Line : Banks tapping CD market as CRR hike begins to bite

Bangalore, July 7 Banks have begun rushing to the certificates of deposit (CD) market anticipating a further tightening of liquidity ahead of the second phase of the Cash Reserve Ratio (CRR) hike coming into effect.

The second phase of the CRR hike comes into effect from July 19. The first phase came into effect on Saturday. As a result at least Rs 9,500 crore of liquidity was siphoned off the banking system.

The rush for CDs pushed up rates to 10 per cent, the highest since April this year. Among the banks that have tapped the CD market at these rates included the public sector Allahabad bank, banking sources said. Private sector banks were also in the fray, offering high rates for CDs, some of them upwards of 10 per cent, bankers said,

The rush for CDs comes even as some public sector banks early had decided to cap their rates in April this year at 9.5 per cent. However, bankers said, market conditions since then had changed in view of the Reserve Bank of India’s (RBI) combative stance on collaring inflation. Few had anticipated the speed of the RBI hikes in policy intervention

mechanisms.

Bankers said that the most of their respective CD issues were only for short durations of between three and six months.

Most of the banks hoped to refinance the high-cost CD issues with lower cost retail and some bulk deposits after hikes in deposit rates.

Banks had tweaked their respective deposit rates, offering up to 9.5 per cent for maturities of up wards of one year, after the hike in the RBI repurchase rate. Bankers said that deposit accretions were expected to accelerate in the coming weeks after the rate hikes.

The expectation stemmed from weak equity markets and exodus from mutual funds.

Reversal of trend

This trend was a reversal of a decade long period of disintermediation, where bank deposits flowed into the equity markets. The reversal beginning was evident from time deposit accretions into the banking system.

Time deposit accretions this year so far was Rs 1.29 lakh crore, according to the weekly statistical supplement of the RBI. For the corresponding period of last year, accretions were Rs 97,000 crore.

Corporate drawdowns

Bankers said that the mopping up of short-term funds through CDs also coincided with corporate drawdown of sanctioned credit limits which were parked in investments that included bank deposits and Treasury Bills. Some aggressive corporate treasuries also picked up high yield commercial papers that offered rates of over 10.5 per cent.

This form of corporate hedging stemmed from anticipation of further interest rate spikes.

The anticipation was in view of the upward trajectory of government security yields. The ten-year yield to maturity at 9.09 per cent is currently at the highest level since September 2001.

The tight situation was apparent from the recourse to the RBI’s Repurchase window at the liquidity adjustment Facility Auction.

At Monday’s auctions, liquidity support to 30 banks and primary dealers amounted to Rs 31,490 crore.

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