Indian Banks Make Efforts To Secure Cheap Funding

As funding in the banking system continues to decline, Indian banks have expanded their fundraising activity through the sale of certificates of deposits, according to analysts.

"Banks are not hiking deposit rates, as they are able to collect funds from the money market simply by issuing CDs, and that too cheaply," said Raju Sharma, head of fixed income at IDBI Mutual Fund. "They may continue to opt for this mode of fundraising for the next few weeks." In the two weeks leading up to August 19, Indian commercial and state-run banks generated over 300 billion rupees ($3.76 billion) through two-month to one-year CDs, a considerable increase from the roughly 50 billion rupees in the two weeks prior.

Larger lenders have also gotten on board and are aggressively borrowing money through three-month and one-year notes, including Punjab National Bank and Bank of Baroda. These lenders are willing to lock up money for a year at a rate of 6.60% to 6.74% in anticipation of impending policy tightening.

According to IDBI Mutual Fund's Sharma, "Debt funds that are mandated to invest in shorter duration are always on the hunt for investment possibilities, which is the main reason banks are able to collect big quantums without any significant variation in rates." According to Upasna Bhardwaj, chief economist of Kotak Mahindra Bank, "we expect the liquidity tightness to lead to an effective policy rate hike of 60-75 bps."