Certificate of deposit (CD) issuances by private sector banks in India hit an eight-month high in August primarily due to the incremental cash reserve ratio (CRR) requirement and shrinking liquidity in the banking sector.
Funds raised by private sector banks more than doubled on a monthly basis and increased by 43% year-on-year to reach Rs 2,514.5 crore.
HDFC Bank led by raising Rs 557.5 crore, followed by ICICI Bank with issuances worth Rs 482.5 crore.
The Reserve Bank of India (RBI) introduced an incremental CRR of 10% on the net demand and time liabilities of scheduled banks between May 19 and July 28, with the measure taking effect from August 12. This was aimed at absorbing excess liquidity from the banking system, as surplus liquidity had increased due to the return of Rs 2,000 banknotes, RBI’s surplus transfer to the government, government spending uptick, and capital inflows.
The banking sector liquidity remained above Rs 1 trillion throughout July, leading to a decline in CD issuances, with short-term debt borrowing by banks falling by 11% year-on-year to Rs 455.55 crore in that month.
However, the introduction of the incremental CRR caused liquidity in the banking system to slip into a deficit of Rs 236.44 crore on August 22, remaining in deficit for almost a week before returning to a surplus of Rs 541.32 crore on August 31.
In total, borrowing through short-term instruments by banks increased by 26% on a monthly basis to Rs 5,737 crore in August. In August 2022, banks borrowed Rs 6,026.3 crore through CDs.
PSBs hold a lion’s share
Despite the significant increase in CD issuances by private banks in August, state-owned banks continued to account for over half of the short-term debt issuances. State-owned banks represented 56% of the total issuances, amounting to Rs 3,222.5 crore. Canara Bank led among state-owned banks, raising Rs 1,300 crore, followed by Bank of Maharashtra with issuances worth Rs 465 crore.
Rates on three-month CDs increased by 10 basis points to 7.00-7.20% in August.
In August, companies and financial institutions in India raised Rs 11.6 lakh crore through commercial papers (CPs), marking a 25% increase month-on-month. In August 2022, CPs worth Rs 14.9 lakh crore were issued.
Housing finance companies also increased their CP issuances due to strong demand from mutual fund houses, raising Rs 79.5 crore last month, the highest in three months.
The consistent inflows in the liquid funds of mutual funds have maintained the demand for short-term papers. According to the Association of Mutual Funds in India, mutual funds saw net inflows of Rs 6.14 lakh crore in July, with Rs 5.19 lakh crore in liquid funds.
