Indian banks have completely halted short-term debt sales, with no certificates of deposit issued in the three trading sessions through July 2, according to data from The Clearing Corp. of India Ltd. This represents a dramatic shift from the ₹1.80 lakh crore raised in June, which had already shown a 61.79% increase from May's ₹1.12 lakh crore. The pause follows a significant decline in issuance, with banks raising only ₹70,800 crore between June 16-29, down from approximately ₹1 trillion in the first half of June. As reported by Business Standard, the slowdown is especially notable as banks typically raise short-term funds to strengthen their balance sheets toward the quarter-end, with issuance in the second half of June being 19% less than the ₹87,200 crore raised a year earlier according to CCIL data.
The Reserve Bank of India's initiative to attract foreign-currency deposits has opened up a cheaper and more durable funding alternative, prompting banks to significantly reduce their reliance on CDs. The RBI's decision in June to absorb hedging costs for lenders raising dollars overseas is expected to draw in more than $50 billion, providing banks with a cheaper alternative to CDs. Anshul Chandak, head of treasury at RBL Bank Ltd, noted that foreign-currency deposit flows have started coming into the banking system and banks are viewing this as "a more stable, permanent cash flow." According to Business Standard, bank executives expect the slowdown to persist until September following the RBI's decision, with RBL Bank's Chandak expecting "banks will refrain from issuing CD excessively in July-September on expectations of foreign-currency deposit flows." The move is expected to provide lenders with a cheaper alternative to CD, which they have traditionally relied on to fund loan growth that has consistently outpaced deposit mobilization.
CD rates have already begun declining significantly, with the one-year CD rate easing to 6.84% on Thursday from a two-year high of 7.96% in May, according to Bloomberg data. By comparison, banks are offering as much as 7.75% on foreign-currency deposits with maturities of three to five years. As reported by Business Standard, RBL Bank's Anshul Chandak expects CD rates to now stabilize and harden from September only if the RBI uses tools to suck out liquidity aggressively. The shift reflects banks' preference for the more stable, permanent cash flow offered by foreign-currency deposits over the traditional CD route, with the cost of borrowing via these instruments having already declined substantially.
Major banks are already implementing strategies to replace expensive CD funding with cheaper forex alternatives. Axis Bank Ltd. CEO Amitabh Chaudhry indicated the bank will use foreign-currency deposits raised from the Indian diaspora in the next few months to replace expensive funds, as reported by Business Standard. The funding strategy shift comes as banks continue to face challenges with robust credit growth outpacing deposit mobilization, creating ongoing pressure on their funding requirements. CSB Bank's Alok Singh expects CD issuances to be lower until August-September, with rates having the potential to fall further by 20-25 basis points from current levels.
