Certificates of deposit issuance rises to a 5-month high in December on uptick in credit growth

“Banks require funds to maintain their reserves and also cater to the growing demand fir credit so banks are raising funds by issuing Certificate of Deposits ranging from three months to a year,” said Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house.

Credit growth 

Banks' credit growth has picked up substantially in the last few months and it outpaced deposit growth.

This has forced banks to increase deposit rates sharply to attract more deposits.

According to the Reserve Bank of India’s (RBI) Sectoral Deployment of Bank Credit data, credit growth to industry accelerated to 13.1 percent on-year in November 2022 from 3.4 percent in November 2021.

Size wise, credit to large industry increased by 10.5 percent as against a contraction of 0.6 percent a year ago. Medium industries recorded credit growth of 29.7 percent in November 2022 as compared with 37.4 percent last year. Credit to micro and small industries rose by 19.6 percent from 15.3 percent a year ago.

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“Banks are quick enough to adjust their lending rates based on RBI MPC policy outcome; however, they don’t react immediately to increase their deposit rates.  This strategy helps banks to be more profitable,” Srinivasan said.

He added that deposit rate movement totally depends on demand-supply factors besides RBI rate hikes and banking system liquidity.  Hence, banks wait for an opportune time to issue certificates of deposit to achieve finer pricing.

Borrowing cost 

After the continuous rate hike by the RBI since May, the borrowing cost on these instruments has increased sharply by more than 300 basis points till date.

CDs maturing in three months, which were trading in the range of 4 percent to 4.05 percent at the start of May, are now trading at 6.90-7.05 percent levels.

In December, the rates on these instruments eased a bit after stability in the domestic environment such as easing inflation figures and a lower rate hike by the RBI.

“CDs at their current rate are quite attractive Debt Funds to park their short term funds and banks are able to raise enough money to meet it requirements,” Tulsyan added.

Spreads between repo and CD is just 70-90 basis points, which dealers expect to increase in the coming month if the central bank hikes the repo rate in February and on the back of expected tight liquidity conditions.

On January 6, liquidity in the banking system was in surplus of around Rs 1.56 lakh crore.

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Outlook 

Money-market dealers expect banks to continue to raise funds for their working capital and funding needs amid growing credit growth.

“To meet the growing credit demand banks will require a cheap and reliable source of funds, so banks will increase borrowing by issuing CDs to fulfil their liquidity and lending requirements,” Tulsyan said.

On the rates front, dealers expect them to rise further in the coming months due to expected higher borrowing by the government which will ultimately increases the yields on the government securities.

Srinivasan said government bond yields may inch up in the coming months and push bank deposit rates to some extent.

Bank deposit rates correlate with RBI MPC policy rates, government bond yield movement, credit growth, system liquidity and demand-supply factor.