Context:
- Outstanding CDs surged to a historical high of ₹5.19 trillion on Feb. 7.
- Commercial Papers rose to ₹4.79 trillion on Feb. 15, the highest after October 2019.
- The liquidity deficit in the banking system continues for 10 consecutive weeks, standing at ₹2.37 trillion currently.
- The RBI is likely to soon announce additional measures to enhance liquidity, including a $10 billion swap on Feb. 28.
Reasons for the Banks’ Reliance on CDs and CPs
- Slow growth in deposits coupled with strong credit demand in the fourth quarter.
- ₹71,094 crore worth of CDs were issued in the two weeks ended Feb. 7.
- Large borrowers are choosing CPs since they expect lower policy rates.
Liquidity Coverage Ratio (LCR) limitations
- Only 2.3% of banks’ deposits today would be in CDs as against 8% a decade back before the introduction of LCR.
- Core liquidity at ₹34,000 crore (Jan. 25) remains low because of forex interventions and March tax outflows.
- RBI liquidity measures would include:
- $10 billion buy/sell swap with a three year tenor on Feb. 28.
- Second swap auction after a $5 billion injection with a six month tenor on Jan. 31.
Commercial Paper (CP)
Commercial paper (CP) is a short-term debt instrument that companies use to raise funds. It’s a promissory note that acknowledges a debt and promises to repay it within a set time.
How it works?
- CP is usually offered at a discount and matures in one to six months.
- CP is an unsecured form of debt, meaning it doesn’t have collateral.
- It’s typically issued by large corporations or banks.
- CP is used to finance short-term needs like payrolls, inventories, and accounts payable.
