Incremental CRR: As liquidity tightens, banks push CDs
certificates of deposit to meet funding requirements amid tighter liquidity conditions after the Reserve Bank of India (RBI) implemented steps to drain out surplus funds with lenders.
From August 18 to August 23, banks have issued certificates of deposit worth Rs 21,470 crore in the primary market, data provided by industry sources showed. The amount issued over just that period is more than half of the sum of Rs 40,625 crore issued in the whole of July, with private banks leading the pack, the data showed.
The acceleration in the issuance of CDs — which are short-term debt instruments used by banks to raise funds —— comes after the RBI imposed an incremental Cash Reserve Ratio (ICRR) of 10% on the growth in bank deposits from May 19 to July 28.
The ICRR requirement, which became effective from the fortnight beginning August 12, is estimated to have impounded funds worth around Rs 1.1 trillion from banks. The central bank will review the ICRR by September 8. “With the implementation of ICRR for a brief period, the tightness in the banking system liquidity is cropping up.
As a measure to address this additional fund, private banks have resorted to issuing certificates of deposits (CDs), especially banks with relatively less access to easy deposit,” analysts from India Ratings & Research wrote.
Banking system liquidity in deficit as incremental cash reserve ratio kicks in
According to the data four public sector banks — Canara Bank, Punjab National Bank, Bank of Baroda, and Bank of Maharashtra — have issued CDs worth a total of Rs 8,100 crore in the primary market from August 18 to August 23.
Meanwhile, five private banks — Axis Bank, ICICI Bank, IDFC First Bank, HDFC Bank and IndusInd Bank — have
