A steep drop in average daily banking liquidity between September and October has forced financial institutions to step up certificate of deposit issuances. This shortfall is compounded by Treasury-bill yields rising to nearly two-year highs, which directly lifts pricing for bank paper. Yields on short-term debt benchmarks like the 364-day Treasury bill jumped 20 basis points at recent auctions, dragging certificate of deposit yields higher alongside them. Treasury officials warn that these volatile financial conditions mean borrowing costs could rise even further.
Key points
Lenders are competing for short-term liquidity by aggressively ramping up certificate of…: Lenders are competing for short-term liquidity by aggressively ramping up certificate of deposit issuances.
Benchmark Treasury-bill yields have reached their highest points in nearly two years, inf…: Benchmark Treasury-bill yields have reached their highest points in nearly two years, inflating spreads on commercial instruments.
Treasury executives project that bank paper rates may climb higher as market participants…: Treasury executives project that bank paper rates may climb higher as market participants price in future rate hikes.
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Comparable CD rates had fallen to around 6.6% in August, when FCNR(B) inflows left the banking system awash with liquidity.
Banking system liquidity moderated to a daily average surplus of ₹2.3 lakh crore in October, after a daily average of ₹7.7 lakh crore in September. This shortage of funds has increased demand for liquidity, prompting CD issuances to pick up.
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"CD rates are amongst other things a function of the underlying risk-free rate, which is the equivalent tenor T-bill. Rates of T-bills shot up 20-25 bps at the last auction and additionally there is demand coming in because of the liquidity squeeze," said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
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Yields on treasury bills-bonds with a tenure of less than one year- jumped to their highest level in nearly two years. The…
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