RBI Grade BNABARD ESISEBI
In one lineMore on this exam
Source: BS
“RBI MPC Unpacked: Key Theory Meets Today’s Macro Trends”Tap to play · from the C4S channel
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. |
