Banks and Non-Banking Financial Companies (NBFCs) are actively seeking short-term funds from money markets to address immediate financial needs following liquidity crunch due to the implementation of incremental cash reserve Ratio.
Banks raised Rs 14,390 crore through the issuance of certificates of deposit (CD) of which Rs 900 crore were raised on August 14, followed by Rs 2,515 crore on August 17, Rs 9,475 crore on August 18, and Rs 1,500 crore on August 21, according to reports.
The banks that raised funds via CDs include Punjab National Bank, Canara Bank, HDFC Bank, Bank of Baroda, and Indian Bank. The prevailing 3-month CD rates are now positioned between 7.00% and 7.20%. Simultaneously, three-month Commercial Papers (CPs) are being offered at rates ranging from 7.20% to 7.40%.
The I-CRR move
The Reserve Bank of India (RBI) mandated scheduled banks to maintain an I-CRR of 10%, applicable to the increased deposits during the period spanning May 19 to July 28, 2023. This measure was initiated with the intention of managing liquidity within the banking system.
Market experts see an uptick in interest rates as a direct consequence of the policy, which has prompted various issuers to tap the market.
While initial expectations pointed towards a potential rollback of I-CRR measures around September 8, recent market sentiment suggests a potential extension, which is prompting more issuers to raise funds.
Goods and Services Tax (GST) payments and a sustained demand for credit have also contributed to the liquidity deficit of over Rs 23,000 crore, as reported by RBI data.
Why the rush
Though the rates are high, banks are raising funds through CDs as they can avoid mobilising high-cost longer-term deposits, as they anticipate the RBI rolling back I-CRR soon. Meanwhile, the call money rate has recently surged beyond the repo rate in recent trading sessions. Analysts predict that rates may stabilise around the onset of September due to likely government expenditures. However, the mid-month advance tax payments could induce renewed liquidity constraints, suggesting that elevated rates might persist for the next 1-1.5 months.
