The borrowings of Indian banks via Certificates of Deposits (CDs) have fallen by about ₹1.3 lakh crore over one month, suggesting reduced stress in the banking system after some actions initiated by the Reserve Bank of India (RBI) aimed at enhancing liquidity in the economy.
The fall in the CD borrowings has come on the back of some actions initiated by the RBI to improve liquidity conditions in the financial system. Increased liquidity enables banks to depend less on market instruments for meeting their borrowing requirements.
A Certificate of Deposit is a short-term money market instrument through which banks obtain money from the market. When banks feel a need to have additional money, they tend to depend more on CDs. Falling levels of CDs may suggest reduced stress in the banking sector regarding borrowing.
Some measures undertaken by the RBI to improve liquidity conditions in the banking sector have enabled banks to manage their borrowings better.
The drop in the amount of borrowings from CDs may also affect money market situation and short-term interest rates. The decreased reliance on CDs might make the competition between banks for short-term finance less intense and increased liquidity might help facilitate the transmission of monetary policy.
In relation to the banking system, the development has happened against the background of the importance of liquidity management to ensure credit growth stability. In this situation, banks pay close attention to the funding cost and deposits inflows while managing lending needs and liquidity needs.
The large decline in the amount of borrowings from CDs proves the effectiveness of the RBI’s liquidity operations and the fact that the funding situation of the banks is improving. For further developments, changes in the liquidity situation, credit demand and deposits will be of utmost importance.
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