Certificate of Deposit Rates to Rise Further on Liquidity Crisis

Short-term borrowing rates in India are expected to rise due to the credit crunch in the banking system. These rates are expected to rise in next few weeks as companies pay advance taxes, increasing the severity of cash shortage in the financial system.

Certificate of Deposits (CD) are short term money market instruments issued by banks, financial institutions, companies/businesses for relatively short duration that have maturity more than 7 days and less than 1 year and pay a fixed rate of interest until a given maturity date.

Borrowing rates on 3-month Certificate of Deposits were at 9.70% as on 28 May 2012, while borrowing rates for 3-month commercial paper surged to 10.23%. Bankers expect 3-month Certificate of Deposits to rise as high as 10.25% in June and the 1-year CD to rise as much as 10.30%.

Traders are now supporting for bad liquidity conditions as companies are expected to pay as much as Rs.30,000 crore cash in advance taxes starting in mid-June. Dealers estimate that up to Rs.1,40,000 crore of Certificate of Deposits will be rolled over by the end of the June, which may further worsen liquidity.

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