Indian banks are facing liquidity constraints and are turning to certificates of deposit (CDs) as a solution for their short-term funding requirements. According to a report by Reuters, December is expected to witness the highest issuance of CDs since March. In November alone, banks raised ₹76,200 crore through the sale of CDs, marking the highest amount for this financial year, as reported by information provider Prime Database.
Significant Increase in CD Fundraising in December
As of December 11, Indian banks have successfully raised funds totaling ₹51,500 crore through the issuance of certificates of deposit. This surge in fundraising can be attributed to the prevailing deficit in the banking system’s liquidity, reaching its highest level since April 2019. Factors such as tax outflows and quarter-end cash requirements are prompting banks to seek additional funds.
Preference for CDs over Fixed Deposit Rates
Despite the liquidity tightness, banks are hesitant to raise fixed deposit rates and instead find CDs to be a more favorable option. Mutual funds, who have recently reduced their government bond purchases, are also showing interest in these short-term papers. Although CD rates have increased, banks seem unconcerned as they continue to attract bulk funding.
Growth in CD Issuance
Between April and August of this year, public sector banks and other lenders issued CDs worth ₹2.62 trillion, surpassing the ₹2.5 trillion issuance in the same period last year. The issuance of CDs has shown significant growth, with a rise from ₹25,813 crore in April to ₹72,785 crore in June. There was a slight moderation in July as liquidity turned surplus but saw another increase in August.
Bank’s Response to RBI Monetary Policy Announcement
Banks have praised the Reserve Bank of India’s recent monetary policy announcement. With key policy rates left unchanged for the fifth consecutive time, the central bank emphasized the need to remain vigilant in the fight against inflation until prices fall to the 4% target. Banks view the measures announced by the central bank as a positive affirmation for the economy, signaling stability in inflation and the potential for high growth exceeding 7% for the third consecutive year.
Conclusion
Indian banks are addressing the liquidity crunch by utilizing certificates of deposit to secure necessary short-term funds. The growing preference for CDs over fixed deposit rates, coupled with the increased issuance in recent months, highlights the effectiveness of this funding strategy. With the support of favorable market conditions and the RBI’s commitment to maintaining stability, banks are confident in their ability to navigate the challenges and sustain economic growth.
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