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CD rates cool down to 9.80% as mutual funds, banks chip in

Banks sit pretty on cash despite huge outflow possibilities as they count on MF redemptions that will help them stay liquid.

, ET Bureau|
Mar 11, 2011, 06.10 AM IST
MUMBAI: Three-month certificates of deposits, or CD rates, have eased to almost 9.80% with greater participation of institutional investors such as mutual funds and large private banks.

"Three-month CD rates cooled off by almost 15 basis points during the day. It could be due to cross deals among banks. Also, mutual funds were staying liquid so far, expecting outflows on account of tax payments. But now they are aware of their real position as rates are ruling high and there are expectations that they will come down by April. Till then, they prefer to stay invested," said Roy Paul, deputy general manager-Treasury , Federal Bank.

Bulk deposit rates have also been going up, with banks scrambling to raise deposits at the end of the financial year. "Banks are raising bulk deposits from corporates such as SAIL and other state-run firms even at rates as high as 10.45%," says a dealer from a large public sector bank, on condition of anonymity. Banks are the major issuers of certificates of deposits, which are short-term instruments for raising funds tradable in the secondary markets, while the dominant investors are mutual funds and some of the bigger lenders. But banks this time find themselves in a fairly comfortable position on the liquidity front, in spite of huge outflows expected due to advance taxes.

Bankers say redemptions from mutual funds in certificates of deposits would help banks to stay liquid in the face of huge tax outflows. "This time around, most of the mutual funds have invested in three-month CDs in a way that their maturities are due by March 15. So unlike on the previous occasions, there would be no distortions in terms of liquidity. Banks’ investments in mutual funds are about Rs 1 lakh crore," said C Rajendran, treasury head of Corporation Bank. "While MF investments in three-month CDs of almost Rs 130,000 crore will be redeemed by March15, our estimates of tax outflows is about Rs 90,000 crore. We have the liquidity adjustment facility (LAF) window also available to us from RBI. If it’s cheaper , banks might borrow funds from the central bank and not touch the investments in mutual funds. So the liquidity situation should not be difficult to handle," he added. Dealers say, the markets have already factored in a policy rate hike of 25 basis points in the midpolicy review of RBI due on March 17.
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