Context:
CD rates declined by 20-30 bps and currently, are between 7.40% – 7.51%. This was compared to 7.10% – 7.20% in December.
Liquidity Crisis
- Systemic liquidity shortage touched ₹2 trillion mainly as RBI did not rollover buy/sell swap payments at maturity.
Impact on Borrowers
- Increasing borrowing cost and lagging incremental deposits relative to credit increase the liquidity pressure.
Possible Moves by RBI
- Liquidity infusion measures include purchase of Open Market Operations, buy-sell swaps, possible Cash Reserve Ratio reduction, and a multi-pronged approach.
Commercial Paper (CP)
- It is a short-term, unsecured promissory note issued by corporations for meeting working capital requirements.
- It has maturities ranging from 7 days to 1 year.
- Normally issued at a discount to face value and redeemed at par.
Certificate of Deposit (CD)
- A time deposit offered by banks and other financial institutions, with a fixed return over a specified period.
- Maturities of short-term CDs usually range from 7 days to 1 year, while those of long-term CDs may extend further.
Key Differences between CP & CD
| Aspect | Commercial Paper (CP) | Certificate of Deposit (CD) |
|---|---|---|
| Issuer | Corporations, financial institutions. | Banks and financial institutions. |
| Security | Unsecured. | Secured against bank’s deposit base. |
| Purpose | Short-term funding for operations. | Resource mobilization for banks. |
| Risk Level | Higher, depends on issuer’s credit. | Lower, backed by bank’s credibility. |
| Market Participants | Corporates, mutual funds, investors. | Retail investors, institutions. |
| Interest Rate | Higher than CDs; market-driven. | Comparatively lower; fixed. |
