Certificate of deposit issuances by banks surged in September as the banks sought to raise resources for the festive season amid a tight liquidity crunch.
CDs are short-term debt instruments utilized by banks to raise funds.
In September, banks issued CDs worth Rs 73,856 crore, a significant increase compared to Rs 56,895 crore in August and Rs 45,550 crore in July.
As banks rushed to secure funds through CD issuances, the six-month and 12-month CD rates increased by 2 basis points (bps) and 5 bps, respectively, in September. In contrast, the three-month CD rates fell by 3 bps to 7.05 per cent.
Liquidity squeeze
This liquidity crunch was primarily a result of the deficit liquidity and banks borrowing from the Reserve Bank of India (RBI). Additionally, the incremental credit reserve ratio (ICRR) absorbed some liquidity by the RBI, which was to be disbursed in tranches.
The deficit liquidity reached nearly Rs 1.47 lakh crore on September 19, the highest level since January 29, 2020, when it reached Rs 3 lakh crore. This liquidity shortage began on August 21 for the first time in the current financial year.
Experts say banks may continue to raise funds through CDs, given that liquidity may remain tight in October. However, they expect an improvement compared to September due to government spending and the disbursement of the last tranche of I-CRR.
In October, there are expected to be fewer issuances as it marks the beginning of a new quarter. The RBI has planned to phase out the I-CRR by October 7. Of the total I-CRR maintained, 25 per cent was disbursed on September 19, another 25 per cent on September 23, with the remaining 50 per cent set to be released on October 7.
The deficit liquidity situation in the banking system has persisted since September 15 due to advance tax outflows and GST payments. Last week, the central bank injected Rs 1 lakh crore, according to data from the RBI.
