Banks cut short-term debt on cheaper FX fund

Indian lenders are pulling back short-term debt sales as the central bank’s recent push to attract foreign-currency deposits has opened up a cheaper and more durable source of funding.Banks haven’t issued any certificates of deposit — debt instruments maturing within one year — in the three trading sessions through July 2, according to data from The Clearing Corp. of India Ltd.

The pause follows a decline in issuance, with banks raising 708 billion rupees ($7.4 billion) between June 16 and June 29, down from about one trillion rupees raised in the first half of the month.Bank executives expect the slowdown to persist until September following the Reserve Bank of India’s decision in June to absorb hedging costs incurred by lenders that raise dollars overseas.

The move is expected to draw in more than $50 billion, providing lenders with a cheaper alternative to CD, which they have traditionally relied on to fund loan growth that has consistently outpaced deposit mobilization.“Banks will refrain from issuing CD excessively in July-September on expectations of foreign-currency deposit flows,” said Anshul Chandak, head of treasury at Emirates NBD-backed RBL Bank Ltd.

“We expect CD rates to now stabilize and harden from September only if the RBI uses tools to suck out liquidity aggressively.”Also read: Is enforcement of banking regulations ownership neutral?132205787The slowdown in CD issuance is especially notable as banks typically raise short-term funds to strengthen their balance sheets toward the quarter-end.

The issuance in the second half of June is about 19% less than 872 billion rupees raised a year earlier, according to CCIL data.The cost of borrowing via these instruments has already declined, with the rate on one-year CD easing to 6.84% on Thursday from more than two-year high of 7.96% in May, according to data compiled by Bloomberg.

By comparison, banks are offering as much as 7.75% on foreign-currency deposits with maturities of three to five years.Axis Bank Ltd. will use foreign-currency deposits raised from the Indian diaspora in the next few months to replace expensive funds, Chief Executive Officer Amitabh Chaudhry said in a recent interview.Foreign-currency deposit flows have started coming into the banking system and banks are viewing this as “a more stable, permanent cash flow,” said Alok Singh, head of treasury at Fairfax-backed CSB Bank Ltd.

“We expect CD issuances to be lower until August-September, and rates have the potential to fall further by 20-25 basis points from current levels.” ...