PSBs (Public Sector Banks) are taking the lead in India’s Certificate of Deposit (CD) market, using this short-term funding tool more aggressively than their private sector counterparts. CDs are money market instruments that banks issue to raise funds quickly—usually for a few months. And right now, they’re in high demand.
Why? Because credit is growing fast, but deposits aren’t keeping pace. This has pushed many banks—especially PSBs—to tap into the CD market more than ever.
A detailed analysis in the June RBI Bulletin dives deep into this trend. It looks at the key players, drivers, and risks in the Indian CD landscape. The findings are clear: liquidity, interest rate expectations, and credit-deposit gaps are shaping this market.
Mutual Funds Are Driving the Demand
On the other side of the table, mutual funds are lapping up these CDs. In fact, they hold 85% of the entire CD market. That’s huge. With CDs offering slightly higher returns and manageable risk, mutual funds see them as a safe and smart parking spot for short-term money.
This creates a strong loop—PSBs issue CDs to meet funding needs, and mutual funds happily buy them.
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PSBs Enjoy a Lower Cost
Interestingly, PSBs are not just dominating the volume—they’re also paying less to issue CDs compared to others. Their brand strength and government backing probably help. In contrast, Small Finance Banks (SFBs) pay a higher rate, reflecting their higher risk profile. Still, the gap between PSBs and others is shrinking, especially since July 2022.
What Drives CD Issuance?
Let’s break it down:
- In the long run: Tight liquidity, rising credit, low deposit growth, and market volatility push banks to issue more CDs.
- In the short run: It’s mostly about liquidity. When cash is tight, banks go shopping in the CD market.
And while rising interest rates can cool things down, the need for short-term funds often wins out.
Final Thoughts
This surge in CD activity shows how PSBs are using smart tools to stay liquid and lend more. At the same time, mutual funds are stepping in as confident partners. It’s a symbiotic play—one that’s shaping how short-term money moves in India.
If you’re tracking financial trends or money markets, keep your eyes on this dynamic. It’s not just about banks and funds. It’s about how India’s credit engine stays running even when fuel—aka deposits—isn’t filling up fast enough.
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