Banks Prefer Certificate of Deposits Over Term Deposit Rate Hikes Amid Shrinking Liquidity

Indian banks are currently holding off on increasing term deposit rates following the recent repo rate hike and shrinking liquidity surplus. Instead, financial institutions are increasingly relying on Certificate of Deposit (CD) issuances for resource mobilisation.

Data for October 2026 shows that while CDs aggregating ₹78,290 crore matured during the month, fresh issuances stood significantly higher at ₹98,195 crore. This resulted in a net incremental issuance of ₹19,905 crore, indicating that banks raised resources well beyond the amount required simply to replace maturing instruments.

The weighted average rate (WAR) of CD issuances in October 2026 climbed to 6.93 per cent, compared to a WAR of 6.57 per cent on the CDs that matured during the same period. CDs are negotiable money market instruments issued by banks and All India Financial Institutions in demat form or as Usance Promissory Notes, with maturities ranging from seven days up to one year.

V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, noted that the net incremental issuance of CDs and the yield increase of about 36 basis points suggest banks are actively securing additional short-term resources at higher rates rather than merely rolling over existing liabilities. While some banks have issued CDs exceeding their maturities, others have maintained a more conservative issuance approach.

Industry participants point out that mopping up short-term resources of up to one year at higher rates remains a preferred option compared to upping term deposit rates, which would lock banks into elevated costs for longer durations.

Commenting on market dynamics, Reddy explained that one-year CD rates are trading approximately 250 basis points above the prevailing repo rate. This spread reflects a combination of factors, including a liquidity premium where banks pay more to secure funds for specific tenors rather than depending on uncertain overnight liquidity, and interest rate expectations regarding potential monetary tightening.

Additional factors influencing the spread include refinancing requirements for banks with higher credit-deposit ratios and significant maturity obligations, alongside regulatory considerations such as maintaining adequate Liquidity Coverage Ratio buffers and managing wholesale funding concentration.

Following the Reserve Bank of India's rate-setting panel hiking the repo rate by 25 basis points from 5.25 per cent to 5.50 per cent on October 7, there has been a direct transmission to loans linked to the external benchmark lending rate. However, term deposit rates have remained unchanged.

"The current reliance on Certificate of Deposits over raising term deposit rates demonstrates a calculated short-term strategy by banks to manage liquidity without locking in high-cost liabilities for extended periods. As funding costs shift and term premiums widen, financial institutions are clearly prioritizing funding certainty and regulatory compliance over traditional retail deposit adjustments. This approach highlights how treasury teams are navigating evolving monetary policies while maintaining balance sheet flexibility." — Dr. Shishir Gupta, Founder & CEO, StartupLanes