RBA interest rates: governor Michele Bullock explains decision to lift cash rate to 4.85% – video

Mumbai: Recently, one-year certificate of deposit (CD) rates at public-sector banks have soared above 8%, driven by a liquidity squeeze, higher treasury bill yields, and expectations of further rate hikes to curb inflation. CD rates once fell to around 6.6% in August, following an influx of FCNR(B) funds that left the banking system with surplus liquidity.

The banking system's liquidity has since moderated, with a daily average surplus of ₹2.3 lakh crore in October, compared to ₹7.7 lakh crore in September. This liquidity shortfall has heightened demand for liquidity, leading to a surge in CD issuances. In the fortnight ending August 31, banks issued ₹19,505 crore in CDs. Issuances rose to ₹74,607 crore by September 30 and dipped to ₹45,781 crore by October 15.

Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, explained that CD rates are influenced by the risk-free rate, represented by the equivalent tenor T-bill, and the current surge is a result of the liquidity squeeze. Treasury yields on bills with a tenure of less than a year have jumped to their highest level in nearly two years, with the 364-day T-bill yield reaching 6.69%, 20 basis points above its previous successful auction.

CD rates are priced at a spread from their corresponding T-bill rate. The increase in short-term rates is not solely due to liquidity deficits but also because of anticipated rate hikes, according to Gopal Tripathi, head of treasury at Jana Small Finance Bank. Tripathi cautioned that the rate trajectory is skewed upwards, and markets are preparing for a rate hike, indicating that this may not be the peak of CD rates.