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Rates on 90-day deposits touch 26-month high

Interest rates on 90-day certificate of deposits touched a 26-month high as banks were seen rushing to build up their deposit base, which is very common towards the end of a financial year.

, ET Bureau|
Feb 15, 2011, 06.32 AM IST
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MUMBAI: Interest rates on 90-day certificate of deposits touched a 26-month high as banks were seen rushing to build up their deposit base, which is very common towards the end of a financial year. Certificate of deposits are shortterm deposits raised by banks from fellow banks and such deposits are not offered to individual depositors. Unlike the regular term deposit, these can be traded in the secondary market by banks.

Short-term rates have continued their upwards bias after the Reserve Bank of India raised key policy rates by 25 basis points (one basis point is one-hundredth of a percentage point) during its quarterly review of monetary policy in January. In what could be seen as signs of tight liquidity conditions, banks have borrowed Rs 91,510 crore from the Reserve Bank of India against government securities on the very first day of the reporting fortnight , even as call rates closed at 6.9-7 % in the day.

“Banks for the purpose of large balance sheet size are turning to mobilising certificate of deposits , or CDs, and because of that, rates have inched up. Moreover, liquidity continues to remain tight as revealed by higher repo figures (banks’ borrowing from the repo window from RBI),” said, a treasury official from an old private bank, requesting anonymity. Yields on government securities also cooled off as banks bought securities to build their liabilities . Also, lower IIP numbers coupled with wholesale price inflation cooling off a bit, acting in the favour of the bond markets.

“At this time of the year, everyone is interested in building their balance sheet sizes. To meet their SLR requirements, banks are buying off these bonds, which they have to, in order to build their balance sheets and show the liability figures,” said, Ramesh Kshirsagar, head of treasury, Bank of Maharashtra. “Markets are going by the assumption that lower IIP numbers will make it difficult for RBI to raise interest rates in the near term. Chances of a rate hike might be remote,” he added.

Another factor that could explain hardening of interest rates is the high inflation number for January. India's annual inflation based on wholesale prices eased marginally to 8.23% in January, staying well above the RBI’s target of 7%. While the WPI inflation in January , at 8.23%, is lower than the previous month’s inflation of 8.43%, the decrease is too small to be comfortable, finance minister Pranab Mukherjee said on Monday.

The IIP growth for the month of December 2010 was noted at 1.6% (year-on-year ) while markets had expected it to be 2%.The current month’s reading on YoY growth is the lowest since April 2009. “However, this low number is purely a statistical phenomenon, as December 2009 had clocked a high growth rate of 18.0%. Moreover , the month-on-month growth rate for current month is fairly strong at 10.3%,” said an IDBI Gilts report.

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