Certificate of Deposits (CD) is a money market instrument issued by banks to meet their short-term funding requirement. However, in the recent period it was in focus due to higher issuances accompanied by robust credit growth and a lagging deposit growth.
An article in the June RBI Bulletin examines the market microstructure of certificates of deposit (CDs) in India, including issuers and investors profile and assesses the potential drivers of CD issuances.
Credit growth and tight liquidity conditions are found to enhance CD issuances, while market volatility and current and expected increase in interest rates dampen CD issuances.
Public sector banks (PSBs) rely on CD issuances more than private sector banks. On the investors’ side, mutual funds remain the dominant player with an average share of 85 per cent.
Among different categories of banks, PSBs enjoy lower cost of CD issuance on an average than others. However, the spread in the rate among the banks has narrowed since July 2022. For small finance banks (SFBs), the rate is usually higher than others, reflecting higher risk premia.
Liquidity condition, interest rate expectation, and volatility (VIX) determine CD issuance in the long run. Further, increase in credit advances with lower deposit mobilisation prompts higher issuances.
In the short run also, liquidity is found to be the major driver of CD issuances. The findings reconfirm that CD issuances are mainly driven by liquidity management considerations and short-term funding requirements.