Informist, Tuesday, May 23, 2023
By Vishal Sangani
MUMBAI – The Reserve Bank of India's decision to withdraw 2,000-rupee denomination banknotes may lead to a fall in issuances of certificates of deposit as the surge in deposits and liquidity will help banks meet their funding needs, market participants said.
In a surprise move, the central bank on Friday announced the withdrawal of 2,000-rupee denomination banknotes from circulation by Sep 30. Public can deposit these banknotes into their bank accounts or exchange them into banknotes of other denominations at any bank branch starting today.
Banknotes of denomination 2,000 rupees account for 10.8% of the notes in circulation, or 3.62 trln rupees. Even if 30% of this ends up as deposits, the incremental deposits on account of the withdrawal alone will be nearly 1.1 trln rupees.
Most market participants see a gradual increase in deposits over the next four months, which will help banks meet their funding requirements.
Usually, banks depend on deposits and CDs to meet their short-term credit requirement and also for asset liability management.
Market participants expect bank deposits to increase by 1.5-2.5 trln rupees by Sep 30. The liquidity in the banking system might gradually increase by 500 bln-1.50 trln rupees by the end of September.
"Rollover and fresh of issuances of CDs might slow down due to surge in bank deposits and liquidity," a dealer from a state-owned bank said.
In 2022-23 (Apr-Mar), banks issued CDs worth 7.19 trln rupees, more than two and a half times the 2.79 trln rupees of CDs issued in 2021-22. This sharp rise was primarily on account of higher credit offtake this year, as well as lower liquidity in the banking system.
CDs worth 4.31 trln rupees are scheduled for redemption in 2023-24, as per data compiled by Informist.
"We expect bank deposit growth to pick up, as part of these notes are deposited back with banks, as these were not being used for transactions. On our estimates, bank deposit growth may pick up from 10.4% year-on-year in early May to around 10.7% by September, implying additional deposit accretion of 1.2 trln rupees," Nomura Group said in a research report.
As on May 5, banks' total deposits stood at 184.35 trln rupees, up 10.4% on year.
"The banking system liquidity was already in surplus at the end of April. The addition of 1.0-1.8 trln rupees over a period of four months (June to September) will inject significant short-term liquidity into the banking sector over the next two quarters and is likely to reduce the banking sector’s dependence on short-term CDs in the near term to some extent," CareEdge said.
However, with rates softening, some bank dealers and fund managers said they do not see much impact on CD issuances.
"I don't see too much of an impact because this is not withdrawal of a legal tender...It is just being conveyed that the currency in circulation is going to stop, and the RBI is encouraging people to change it," a debt fund manager with a mid-sized mutual fund house said.
"We will continue to see active issuance, especially now that rates have softened so much," a dealer from a big state-owned said.
Fresh issuances of short-term papers by banks may also decline due to moderation in credit growth this financial year, dealers said.
At a post-earnings call last week, State Bank of India Chairman Dinesh Khara said that going forward, the bank expects to see some moderation in credit growth.
Market participant expect bank credit to grow 11-14% in the current financial year, against 15% in 2022-23.
According to the latest data by the RBI, advances by banks grew 15.5% on year to 139.55 trln rupees in the fortnight ended May 5.
Going forward, issuances of CDs will depend on how much of the 2,000-rupee banknotes will get deposited and stay with banks, and how the RBI maintains liquidity in the banking system.
INTEREST RATES
After the RBI's surprise announcement, borrowing costs in the short-term debt market fell by 5-10 basis points on Monday.
"Rates have come done in anticipation of deposits increasing with banks. I personally feel that it may go towards consumption and the deposits may increase by probably August, September," said a dealer from a state-owned bank.
Since last week, rates on short-term debt papers are down 35-40 bps in the primary market after the RBI injected liquidity in the banking system through a 14-day variable rate repo auction. Rates on three-month CPs issued by non-banking finance companies were down at 7.05-7.20% on Monday from 7.15-7.25% on Friday, while rates on papers of manufacturing companies fell by 10 bps to 6.90-7.10%.
Rates on three-month CDs declined to 6.80-7.00% from 6.85-7.05% on Friday.
Banks borrowed 467.90 bln rupees from the 14-day variable rate repo auction for 500 bln rupees. The RBI had announced the auction after money market participants had asked Fixed Income Money Market and Derivatives Association of India to petition the central bank to infuse liquidity through variable rate repo operations as overnight cost of funding had become uncomfortably high.
Liquidity in the banking system is currently estimated to be in a surplus of 474.84 bln rupees, down from 934.61 bln rupees on Monday. The surplus narrowed due to outflows on account of tax payments and repayment of government bonds.
"For a pretty long period, we were seeing overnight rate is well beyond the upper end of the corridor liquidity corridor. I think since RBI has infused liquidity that there is some bit of rally. Now, we have this currency thing," a debt fund manager with a mid-sized mutual fund house said.
Market participants also see liquidity improving further on higher-than-expected dividend payout by the central bank to the government. The RBI's central board of directors on Friday approved the transfer of 874.16 bln rupees as surplus to the central government for 2022-23.
The Budget for the current financial year pegged the surplus transfer from the RBI and dividend from state-owned financial institutions at 480 bln rupees.
The government has already got 129.30 bln rupees from dividend by state-owned banks, according to announcement made by banks, taking the total from the RBI and state-owned banks to a little over 1 trln rupees.
Market participants expect rates on short-term debt papers to stay in a narrow range in the coming days.
"Overall, compared to last week, the rates are going to stay at this level," a dealer from a state-owned bank said. End
Informist Media Tel +91 (22) 6985-4000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2023. All rights reserved.