Indian banks find a way to get cheap funding

Indian banks have increased their fundraising activity through the issuance of certificates of deposit, as funding for the banking system continues to contract, analysts said.

“Banks are not raising deposit rates because they are able to easily obtain money market funds by issuing CDs at too low a cost, and they may continue to choose this route of collecting funds over the next few weeks,” said Raju Sharma, fixed income director at IDBI Mutual Fund.

Private and state-owned Indian banks raised about 300 billion rupees ($3.76 billion) through two-month to one-year CDs in the two weeks to August 19, significantly more than the roughly 50 billion rupees from the previous two weeks, according to data compiled by Reuters showed.

Larger lenders, such as the Punjab National Bank and Bank of Baroda, have also jumped on the bandwagon and are actively borrowing funds through three-month and one-year notes. These lenders are paying around 6.60% to 6.74% for one year funds and want to tie up funds for one year in anticipation of a policy tightening in the near future.

The Reserve Bank of India’s repo rate is 5.40%.

India’s banking system’s excess liquidity fell below 1 trillion rupees and averaged 1.4 trillion rupees in August, down from 1.9 trillion rupees in July and 2.92 trillion rupees in June.

“With the liquidity in the banking system depleted, we expect banks to continue to raise funds through CDs as well as bonds,” said Venkatakrishnan Srinivasan, founder and managing partner of the advisory firm. in Rockfort Fincap debt.

Market participants also said a resumption of credit growth as the economy recovers would create a need for a steady flow of funds into banks. At the same time, mutual funds have been happy to park funds in CDs, making it a win-win for issuers as well as investors.

“Debt funds mandated to invest in shorter durations are always looking for investment opportunities, and this is the main reason why banks are able to obtain significant amounts without any major difference on rates,” said Sharma of the IDBI mutual fund.

“We expect tighter liquidity to lead to an effective hike in the policy rate of 60 to 75 basis points,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

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