CD issuances rise to 7-year high as liquidity squeeze hits banks

Hit by the liquidity squeeze, banks have raised nearly Rs 66,000 crore through Certificate of Deposits (CDs) in the fortnight ending December 15 — the highest amount raised in a fortnight in the last seven years. Previously, the peak for CD issuances was recorded at Rs 67,859 crore in the fortnight concluding in March 2016, showed the Reserve Bank of India (RBI) data. The surge in CD issuance coincides with a liquidity deficit in the banking system which has reached an 8-year-high.

“Liquidity is tight in the banking system and deposits of banks are growing at 12% while credit is growing at 16-17%. Higher credit growth amid lower deposit growth creating pressure on banks to mobilise funds from money market,” said Sanjay Agarwal, Senior Director, Care Ratings.

CD issuances have crossed 50,000 mark for the first time in the current calendar year. Banks had raised Rs 46,762 crore through CDs in the fortnight ended December 1. The liquidity in the banking system has tightened significantly in December on account outflows toward advance tax payments and goods and service taxes.

The liquidity deficit widened to an 8-year-high of Rs 2.58 trillion on Thursday, prompting the central bank to infuse liquidity by conducting a seven-day Variable Rate Repo (VRR) on Friday. Cash-starved banks submitted bids totalling Rs 4.25 trillion, which was approximately 2.5 times the notified amount of Rs 1.75 trillion. A repo auction is conducted by the central bank to inject liquidity into the banking system.

Liquidity crunch has also hardened rates in the money market raising cost of borrowing for the banks. Banks were able to raise funds via CDs at 6.88-7.67% in August but now they are raising funds at 7.06- 7.96%.

“The banking system liquidity remained in deficit in November and exacerbated from October. Moderate government spending and festivals led rise in the cash in circulation caused severe tightness in liquidity in the month of November,” said Soumyajit Niyogi, director – core analytical group, India Ratings & Research. “We expect the liquidity condition to improve meaningfully from January 2024, owing to a surge in government spending ahead of the vote on account and an improvement in the balance of payment account,” he added.