Source: BS
Why in News?
Investors are increasingly shifting from Commercial Papers (CPs) to Certificates of Deposit (CDs) due to higher CD issuances, better yields, and lower perceived credit risk.
Key Trend
- Outstanding CP issuances declined by ~₹1 trillion since August 2025.
- Outstanding CD issuances increased by ~₹1 trillion during the same period.
Commercial Papers (CPs) vs Certificates of Deposit (CDs)
| Basis | Commercial Paper (CP) | Certificate of Deposit (CD) |
|---|---|---|
| Definition | Short-term unsecured promissory note issued for working capital needs | Short-term negotiable time deposit issued to raise funds |
| Issuer | Corporates, financial institutions, NBFCs | Banks and select financial institutions |
| Nature of Instrument | Unsecured debt | Bank deposit instrument |
| Purpose | Corporate short-term financing | Bank short-term liquidity management |
| Credit Risk | Higher (depends on corporate creditworthiness) | Lower (issued by regulated banks) |
| Return / Yield | Generally higher to compensate for higher risk | Usually slightly lower but currently rising due to demand |
| Liquidity | Tradable but relatively less liquid | More liquid and widely traded |
| Investor Base | Mutual funds, banks, institutions, corporates | Mutual funds, banks, institutions, corporates |
| Regulation | Regulated by RBI guidelines for money market instruments | Regulated by RBI banking and money market norms |
| Typical Maturity | 7 days to 1 year | 7 days to 1 year (banks) |
| Collateral Requirement | No collateral (unsecured) | Backed by bank’s financial strength |
| Risk Perception | Sensitive to corporate financial health | Considered safer due to bank backing |
| Market Trend (Recent) | Issuances declining | Issuances rising |
| Main Reason for Current Shift | Higher perceived risk, competitive bank lending | Higher yields, better liquidity, strong bank demand |
| Economic Indicator | Reflects corporate borrowing conditions | Reflects banking system liquidity needs |
Why Investors Are Shifting from CPs to CDs
| Factor | Explanation | Impact on Market |
|---|---|---|
| Higher Yields | Rising interest rates on CDs have made them more attractive than CPs. | Investors shift funds toward CDs for better returns. |
| Lower Credit Risk | CDs are issued by banks, which are perceived safer than corporate issuers of CPs. | Preference for risk-adjusted returns increases demand for CDs. |
| Greater Liquidity | CDs are more easily tradable in secondary markets. | Investors prefer CDs for flexibility and easier exit. |
| Higher Bank Issuances | Banks are issuing more CDs to meet funding needs. | Increased supply boosts CD market share. |
Why Banks Are Issuing More Certificates of Deposit (CDs)
| Driver | Explanation | Effect |
|---|---|---|
| Credit–Deposit Gap | Loan demand growing faster than deposit growth. | Banks raise short-term funds via CDs. |
| Credit Growth | Around 13.1% year-on-year growth. | Higher funding requirement for lending. |
| Deposit Growth | Around 10.6% year-on-year growth. | Insufficient deposit mobilisation. |
| Deposit Tightness | Weak retail deposit growth and intense competition for deposits. | Banks rely more on market borrowing (CDs). |
| Liquidity & Monetary Conditions | RBI liquidity measures influence short-term interest rates. | CDs become flexible and responsive funding tool. |
