The Reserve Bank of India (RBI) has reported that bank Certificate of Deposit (CD) sales have increased threefold in the fiscal year 2022-23. This is due to the tightening of liquidity in the economy, which has led to banks seeking alternative sources of funding.
A Certificate of Deposit is a short-term debt instrument issued by banks and financial institutions to raise funds from the market. CDs are typically issued for tenures ranging from seven days to one year and are an important source of funding for banks. They are also popular among investors looking for short-term, low-risk investment options.
The RBI’s policy report for the fiscal year 2022-23 highlighted the increase in CD sales as a reflection of the current liquidity situation in the economy. The report noted that the increase in CD sales was driven by banks’ need for funds to meet their lending requirements and to maintain their liquidity ratios.
Tightening liquidity in the economy has been a cause for concern among policymakers in recent months. The RBI has been taking steps to ease liquidity conditions and has injected liquidity into the system through various measures, such as open market operations and the targeted long-term repo operations (TLTRO) scheme.
However, despite these efforts, liquidity conditions have remained tight, leading to an increase in CD sales by banks. The report noted that the increase in CD sales was also driven by higher interest rates being offered by banks on these instruments.
The increase in CD sales has also been reflected in the RBI’s latest data on money market operations. The data shows that the outstanding amount of CDs issued by banks increased by 14.5% in February 2023 compared to the previous month.
Experts believe that the increase in CD sales is a reflection of the current liquidity conditions in the economy. They suggest that banks are resorting to alternative sources of funding to meet their liquidity requirements and to maintain their lending operations.
The rise in CD sales is also an indication of the tightening credit conditions in the economy. Banks have been cautious in their lending operations due to the rising non-performing assets (NPAs) in the system. This has led to a decline in credit growth, which has further exacerbated the liquidity situation in the economy.
The RBI’s policy report also highlighted the need for banks to maintain their liquidity ratios and to manage their liquidity risk effectively. The report noted that banks need to be mindful of the potential risks associated with the increase in CD sales, such as the possibility of a sudden withdrawal of funds by investors.
Experts suggest that the RBI needs to continue its efforts to ease liquidity conditions in the economy. They suggest that the central bank could consider additional measures, such as lowering the cash reserve ratio (CRR) or conducting more open market operations, to inject liquidity into the system.
The increase in CD sales has also raised concerns among investors, who are worried about the safety of their investments. While CDs are considered to be low-risk investment options, investors need to be mindful of the creditworthiness of the issuing banks.
Investors should also be aware of the liquidity risks associated with CDs. While CDs are tradable instruments, they are not as liquid as other money market instruments, such as Treasury bills. Investors should be prepared to hold CDs until maturity or to sell them in the secondary market, where they may receive a lower price than the face value.
In conclusion, the increase in CD sales by banks is a reflection of the current liquidity conditions in the economy. While CDs are an important source of funding for banks, investors need to be mindful of the creditworthiness of the issuing banks and the liquidity risks associated with these instruments. The RBI needs to continue its efforts to ease liquidity conditions in the economy to support the growth of the banking sector and the overall economy.
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