With liquidity getting drained, banks issue more CDs to secure cheap funding

Mumbai, Aug 22 Indian banks have ramped up their fundraising activity by issuing certificates of deposit, as funding contracts in the banking system continue, analysts said.

Raju Sharma, Head of Fixed Income, said, “Banks are not increasing deposit rates, because they get money from the money market easily, and that too cheaply, by issuing CDs, and they are looking to raise funds for the next few weeks. May continue to choose this route.” In IDBI Mutual Fund.

Private and public sector banks have raised around ₹30,000 crore ($3.76 billion) through two-month to one-year CDs from two weeks to August 19, a sharp increase from nearly ₹5,000 crore in the previous two weeks , data compiled by Reuters are shown.

Large lenders like Punjab National Bank and Bank of Baroda have also jumped on the bandwagon and are actively borrowing money through three-month and one-year notes. These lenders are paying around 6.60 per cent-6.74 per cent for a one-year fund, and are keen to tie the fund for one year in anticipation of a tightening of the policy in the near future.

The repo rate of the Reserve Bank of India is 5.40 percent.

The liquidity surplus in the banking system has fallen below ₹1 lakh crore, and averaged ₹1.40 lakh crore in August, falling further from ₹1.90 lakh crore in July and ₹2.92 lakh crore in June.

Venkatakrishnan Srinivasan, founder and managing partner, debt advisory firm Rockfort Fincap, said, “With the liquidity exhausted from the banking system, we expect banks to continue to raise funds through CDs and bonds.

Market participants also said a pick-up in credit growth as the economy revives will create the need for a steady flow of funds into banks. Also, mutual funds have been happy to park funds in CDs, thus making it beneficial for the issuers as well as the investors.

Sharma of IDBI Mutual Fund said, “Debt funds which are mandated to invest for a short duration are always on the lookout for investment opportunities, and this is the main reason why they are able to avail large amounts without any major difference in bank rates. are capable of.”

Upasana Bhardwaj, Chief Economist, Kotak Mahindra Bank, said, “We expect the liquidity crunch to lead to an effective rate hike of 60-75 bps.”

Published on

22 August 2022

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https://www.thehindubusinessline.com/money-and-banking/with-liquidity-getting-drained-banks-issue-more-cds-to-secure-cheap-funding/article65797055.ece

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