Banks shore up funds fearing rate hike:BL 241209
Issue certificates of deposit for Rs 20,000 cr.

Commercial banks appear to be trying to second-guess Reserve Bank of India's moves on interest rates and
liquidity management.There is fear that the RBI might suck out excess liquidity through a hike in cash
reserve ratio to rein in inflation. Banks have issued certificates of deposit (CD) aggregating to about Rs
20,000 crore in the past two weeks to mop up resources before they become dear.
Tax outflow
The rash of CD issuances - coming as they do in the backdrop of advance tax outflows from India Inc
totalling Rs 54,000 crore in the December quarter - has led to interest rates on these money market
instruments nudging up by about 25 basis points in the last fortnight.Certificates of deposit are short-term
money market instruments issued by banks. Generally, banks, mutual funds and large companies invest in
these instruments, which have a face value of Rs 1 lakh.
Fortification
Anticipating an upward pressure on interest rates, commercial banks are fortifying themselves with cheap
funds by issuing CDs of longer duration - up to one-year maturity, said a senior bank official with a State-
owned bank.That the flurry of CD issuances has pushed up interest rates on these instruments is
underscored by the fact that while State Bank of Travancore issued one-year duration CDs at 5.75 per cent
on December 7, Bank of Baroda issued one-year CDs at 5.97 per cent on December 18.
Among those that have raised between Rs 500 crore and Rs 1,000 crore through certificates of deposit are
UCO Bank, United Bank of India, Central Bank of India, Punjab National Bank, Corporation Bank, Central
Bank of India, Canara Bank, Bank of Baroda, State Bank of Travancore and State Bank of Hyderabad."One
reason why CD rates have moved up in the last 15 days or so is the cyclical raising of funds by banks to
shore up their top line as the quarter comes to an end. Moreover, liquidity is at a premium currently, as funds
have gone out of the system due to advance tax payments. Hence the rush to issue CDs before rates start
moving up," said a dealer with a public sector bank.
Banks, depending upon their credit rating, are able to raise one-year funds through CDs at a coupon rate of
5.95-6.00 per cent. In the corresponding period last year, banks had raised resources at a higher rate of 9.5-
10 per cent, as liquidity was tight then.According to RBI data, banks have garnered about Rs 83,000 crore in
the first 10 months of the current calendar year through CD issuances against Rs 27,000 crore in the
corresponding period last year.