Short-term money dearer despite rate cut by central bank
Yield on three-month CDs rose to 8.93% on 6 Jan, highest since July 2012
Mumbai: Yields on short-term money market instruments such as certificate of deposit (CD) and commercial paper (CP) have risen on expectations that liquidity in the banking system will continue to remain tight and another interest rate cut by the Reserve Bank of India (RBI) may not come too soon. RBI cut its policy rate by a quarter percentage point on 29 January to 7.75%.
Yield on three-month CDs rose to 8.93% on Wednesday, the highest level since July 2012, and off the recent lows of 8.26% in October.
Six-month CDs are yielding 9.02%, the highest since August and off September lows of 8.50%.
Yields on the short-term borrowings of companies through CP have also increased, though not as sharply as those for banks.
Three-month CP’s 9.07% yield is the highest since 26 December while six-month CP at 9.35% is the highest since 12 December.
Hitendra Dave, head, global markets, Hongkong and Shanghai Banking Corp. Ltd India (HSBC), said banks are borrowing short-term money from the market on expectations that liquidity will continue to remain tight.
Mohan Shenoi, treasurer at Kotak Mahindra Bank Ltd, said the current spike in CD rates resembles the March-end rush by banks to garner deposits because financial institutions like to stay “liquid" in the last fortnight of the financial year.
One bps is one hundredth of a percentage point.
N.S. Venkatesh, head of treasury at IDBI Bank Ltd, said the higher rates banks are paying on CDs could be a result of the current wedge between deposit and credit growth.
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