With mutual fund industry staring a propect of ample liquidity, rate-cut expectation factored-in and fewer issuances of certificate of deposits (CD), yields on CDs have hit lowest levels since the first half of April 2015. CDs are short-term instruments issued by banks to raise funds.
Yields on three-month CD hit 8.05% on Thursday — the lowest level since April 7 — according to data by the Fixed Income Money Market and Derivatives Association of India (FIMMDA). The six-month CD had hit 8.17%, which is lowest since April 20, FIMMDA data show.
On Thursday, Syndicate bank had issued two-month CD at 8.08% while Andhra Bank had issued a similar tenure CD at 8.04%, said market participants, adding that Union Bank had been able to issue two-month CD at 8.00%.
Experts believe this fall in yields is a function of a demand-supply mismatch coupled with rate-cut hopes.
Mutual funds (MF), the biggest investors in CD and commercial papers (CP), are seeing short-term papers in which they had invested during the months of February and March getting matured in the near term.
Moreover, market participants have also indicated an addition of R90,000 crore to the entire system in June on account of maturing government securities and coupons.
However, not many banks are issuing fresh CDs expecting a rate cut in the June policy following which they could possibly lock-in their issuances at lower yields.
“Banks are holding back from issuing CDs as there is an expectation of a rate cut. You can also see an improvement in the liquidity conditions in the market. This is the reason yields have fallen,” said NS Venkatesh, IDBI Bank chief financial officer.
With MFs seeing an improved liquidity and lesser issuances of fresh CDs, yields fell 25-30 basis points since the beginning of May.
“The money market rates have come down because of an improvement in the liquidity conditions. CD rates which were at 8.30% levels have now come down to 8.00% levels as the overnight rates have also fallen compared with what they were in late April,” said R Sivakumar, head-fixed income at Axis mutual fund.
A similar effect is seen on CP market with rates falling to early-May levels. The two-month CP yield has fallen to 8.4% from 8.54% in the beginning of May while the three-month CP had fallen to 8.46%. “You can also find some non-banking finance companies (NBFCs) taking advantage of this fall in rates as the spreads on their CPs have come down,” asid a market expert.
The call rate at which banks lend overnight money to one another stood at 7.62% on Thursday while the collateralised borrowing and lending obligation rate, a money market instrument that uses government securities as collateral, stood at 7.61%.
For Updates Check Stock Market News; follow us on Facebook and Twitter
