Bank CD rates surge above 8% amid liquidity squeeze, rising T-Bill yields
Public-sector banks have recently increased one-year certificate of deposit rates beyond 8%, influenced by stricter liquidity and high treasury-bill yields. The reduction in banking liquidity has led to a noticeable rise in CD issuances lately. Ob...
Liquidity surplus moderates to an average Rs 2.3 lakh crore in October from Rs 7.7 lakh crore in September.
Mumbai: One-year certificate of deposit (CD) rates at public-sector banks have risen above 8% in recent days, amid tight liquidity, elevated treasury-bill yields, and expectations of further increases in policy rates to help restrain inflation.
Comparable CD rates had fallen to around 6.6% in August, when FCNR(B) inflows left the banking system awash with liquidity.
Banking system liquidity moderated to a daily average surplus of ₹2.3 lakh crore in October, after a daily average of ₹7.7 lakh crore in September. This shortage of funds has increased demand for liquidity, prompting CD issuances to pick up.
Banks issued ₹19,505 crore CDs in the fortnight ending August 31. Issuances increased to ₹74,607 crore by September 30 and ₹45,781 crore by October 15, latest data shows.
"CD rates are amongst other things a function of the underlying risk-free rate, which is the equivalent tenor T-bill. Rates of T-bills shot up 20-25 bps at the last auction and additionally there is demand coming in because of the liquidity squeeze," said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
Yields on treasury bills-bonds with a tenure of less than one year- jumped to their highest level in nearly two years. The 364-day T-bill yield was at 6.69%, 20 basis points higher than its previous successful auction, RBI data showed. CD rates are priced at a spread from its corresponding T-bill rate.
"The increase in short term rates is not in isolation with just a liquidity deficit, this is also a function of rate hikes being priced in. The rate trajectory is skewed to the upper side and markets are preparing for a rate hike," said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
"Things are volatile, so I can say with some certainty that this is not the peak of CD rates," Tripathi said.
Best CD rates today, Oct. 14: 11-month or 12-month at 4.40% APY? What the Fed’s September hike means for your pick
