Banks' CD issuances fell sharply by 58 percent in October on comfortable liquidity

Bonds

Fundraising by banks through certificates of deposit (CD) fell sharply by nearly 58 percent in October compared to a month ago, owing to heavy issuances in September and comfortable liquidity in the banking system.

According to the Clearing Corporation of India's (CCIL) data, banks raised Rs 63,590 crore in October as compared to Rs 1.5 lakh crore in September. Punjab National Bank, SIDBI, Axis Bank, IDFC First Bank and Bank of India were the top five issuers in October, raising around Rs 37,490 crore through CDs.

"In October, however, demand for funds eased as credit growth remained moderate," said V Ramachandra Reddy, head, of treasury, Karur Vysya Bank.

Usually, the issuances of CDs are high in September due to quarter-end balance sheet requirements as banks typically face elevated funding requirement. Most banks also come to the market to rollover their papers that are due for maturity, experts said.

Experts added that lower issuances were also because the largest investor base in CD - mutual funds - saw lower inflows into liquid and money market schemes, thus reducing investment appetite.

"Moreover, system liquidity tightened significantly during the month, with the average surplus slipping below Rs 1 lakh crore and even turning negative on certain days. These factors collectively led to a notable drop in CD supply," Ramachandra Reddy added.

Surplus Liquidity 

Liquidity in the banking system remained in the surplus throughout October, expect on few days. The banking liquidity dipped into deficit once the public held on to large quantities of cash during Diwali festivities and businesses transferred large sums on account of goods and services tax (GST).

According to the RBI data, the liquidity started turning into deficit from October 20, on Diwali, and the cash shortfall persisted till October 23.

The deficit stood at Rs 70,169.79 crore on October 20, Rs 61,647.79 crore on October 21, Rs 52,299.79 crore the next day and fell to Rs 2,645.79 crore on October 23.

CD Rates

On the rate front, CD yields inched up by around 10-20 bps in the three-month segment, and by about 5 bps in the one-year segment.

The average cost of CD issuances stood at 6.24 percent in October, compared to 6.03 percent in September.

Liquidity Outlook

Going ahead, the durable liquidity is expected to improve, supported by ongoing CRR reduction, redemptions of government securities worth around Rs 1 lakh crore and expectations of potential OMO purchases.

"As we approach the December quarter-end, demand from banks may pick up again, subject to availability of funds at reasonable yields in the CD market," Reddy added.