Bank CD rates surge above 8% amid liquidity squeeze, rising T-Bill yields

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Liquidity surplus moderates to an average Rs 2.3 lakh crore in October from Rs 7.7 lakh crore in September.

Comparable CD rates had fallen to around 6.6% in August, when FCNR(B) inflows left the banking system awash with liquidity.

Banking system liquidity moderated to a daily average surplus of ₹2.3 lakh crore in October, after a daily average of ₹7.7 lakh crore in September. This shortage of funds has increased demand for liquidity, prompting CD issuances to pick up.

"CD rates are amongst other things a function of the underlying risk-free rate, which is the equivalent tenor T-bill. Rates of T-bills shot up 20-25 bps at the last auction and additionally there is demand coming in because of the liquidity squeeze," said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.

Yields on treasury bills-bonds with a tenure of less than one year- jumped to their highest level in nearly two years. The 364-day T-bill yield was at 6.69%, 20 basis points higher than its previous successful auction, RBI data showed. CD rates are priced at a spread from its corresponding T-bill rate.

"The increase in short term rates is not in isolation with just a liquidity deficit, this is also a function of rate hikes being priced in. The rate trajectory is skewed to the upper side and markets are preparing for a rate hike," said Gopal Tripathi, head of treasury, Jana Small Finance Bank.

"Things are volatile, so I can say with some certainty that this is not the peak of CD rates," Tripathi said.