Banks raised ₹19,905 crore through net incremental Certificate of Deposits in October. By choosing these short-term instruments, banks avoided raising term deposit rates despite shrinking liquidity. V Rama Chandra Reddy said, "A particularly noteworthy feature is the widening term premium." Banks now prefer these flexible options over locking in long-term deposits.
Net incremental CD issuance of ₹19,905 crore in October as weighted average rate rises to 6.93%; term deposit rates stay unchanged
Banks seem to be holding off upping term deposit rates in the wake of the hike in repo rate and shrinking liquidity surplus by relying on Certificate of Deposits (CD) issuances for resource mobilisation.
While CDs aggregating ₹78,290 crore matured in October 2026, fresh issuances were higher at ₹98,195 crore, resulting in net incremental issuance of ₹19,905 crore. This indicates that banks raised resources beyond the amount required to replace maturing CDs.
The weighted average rate (WAR) of CD issuances in October 2026 rose to 6.93 per cent even as the WAR on CDs that matured in the month was at 6.57 per cent.
CDs are negotiable money market instruments issued by banks and All India Financial Institutions in demat form or as Usance Promissory Notes. They have maturity ranging from seven days and up to one year.
V Rama Chandra Reddy, Head of Treasury, Karur Vysya Bank, observed that the net incremental issuance of CDs and rise in yields (upward repricing of about 36 basis points) suggests that banks are not merely rolling over existing liabilities but are actively securing additional short term resources at higher rates.
While some banks have issued CDs in excess of their maturities, others have maintained a more conservative issuance approach.
"A particularly noteworthy feature is the widening term premium. One year CD rates are currently trading at around 250 basis points (bps) above the prevailing repo rate. Such a significant spread reflects a combination of factors -- liquidity premium (banks are willing to pay more to secure funds for specific tenors rather than depend on uncertain overnight liquidity); and interest rate expectations (of further monetary tightening and a potentially higher terminal rate are pushing up term funding costs)," Reddy said.
Further, refinancing requirements (banks with higher credit-deposit ratios and significant maturity obligations are willing to pay a premium to ensure continuity of funding) and liquidity and regulatory considerations (the need to maintain adequate Liquidity Coverage Ratio buffers and manage wholesale funding concentration is influencing banks' liability decisions) are influencing the spread.
Banking industry experts say mopping up short-term resources (of up to one year duration) at relatively higher rates is a preferred option to upping term deposit rates and staying locked in at these rates for a longer period.
Reddy said the CD market is reflecting not just the prevailing cost of money but also the premium banks are willing to pay for funding certainty.
After the RBI's rate setting panel hiked the repo rate by 25 basis points from 5.25 per cent to 5.50 per cent on October 7, while there has been a one-to-one transmission of the same to loans linked to this rate (external benchmark lending rate), term deposit rates remain unchanged.