Commercial banks now prefer one-year certificate of deposit (CDs) to short-term paper (of three- to six-month duration) to raise money, as volatility in the money market in the three months through December has made them focus on stability and improving their balance sheet.
A private bond broking house head said, the December quarter saw sharp rise in rates due to liquidity deficit and rapid movements in interest rates (volatile market).
"So, banks want to reduce the frequency of repricing money raised from the market and the only way it can be done is by issuing CDs of longer tenure."
A senior public sector bond executive said, his bank did not mind offering higher coupon (40-45 basis points) for one-year paper over three- to six-month instrument.
"It will reduce the pressure of redemption and hunt for fresh fund in every quarter."
With retail deposit growth faltering due to negative returns in high inflation environment, banks stepped up their market borrowings (via CDs) in the third quarter.
The quarter was also marked by tight liquidity conditions, pushing up rates on short-term money market instruments beyond 9 per cent mark.
Meanwhile, on Friday, investors, especially fund houses, preferred to remain on the sidelines on expectations that the Reserve Bank of India would hike policy rates at its review on January 25.
"There are expectations that the central bank will hike rates. This may push the rates on short-term instruments," said a mutual fund dealer.
The wholesale price index inflation was at 8.43 per cent in December, compared with 7.48 per cent a month ago.
The market expected the December WPI inflation to rise to 8.50 per cent. Fund houses also preferred to remain on the sidelines on expectation that the short-term rates could rise next week.
The rates are expected to rise to 9.25-9.40 per cent, said dealers.
Three-month certificates of deposits were dealt at 8.95-9.15 per cent, unchanged from Thursday.
Three-month commercial papers were dealt at 9.30-9.50 per cent, compared with 9.20-9.35 per cent on Thursday. Rates on one-year papers were 9.55-9.75 per cent, unchanged from Thursday.
HDFC Bank raised Rs 820 crore by placing one-year CD at 9.75 per cent. SBI associate State Bank of Jaipur and Bikaner placed one-year CD at 9.72 per cent.
Andhra Bank raised Rs 210 crore through three-month instrument carrying coupon rate of 9.17 per cent and Bangalore-based Canara Bank raised Rs 300 crore through CDs of same tenure priced with coupon rate of 9.15 per cent.
