Some Indian banks poised for interest margin gains as short-term funding costs fall

MUMBAI: Some Indian banks could see stronger interest margins in the July-September quarter as the central bank’s measures boost rupee liquidity and reduce the cost of borrowing for funds that mature within a year, four bankers said.

Certificates of deposit (CDs), which banks use to raise funds for up to one year, have seen rates plunge by up to 60 basis points over the past three weeks.

The Financial Benchmarks India Ltd three-month CD reference rate fell to 6.65% last Friday from 7.25% on June 4.

The Reserve Bank of India’s moves to attract foreign currency inflows are expected to bring in billions of dollars, boosting liquidity, lowering funding costs and reducing reliance on CDs, a relatively expensive source of funding.

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State-run Canara Bank, among the biggest issuers of CDs, expects the measures to help it refinance existing liabilities at much cheaper rates, said MD & CEO Brajesh Kumar Singh.

“It will help our net interest margins,” said Singh.

At its June 5 policy, the RBI said it will bear hedging costs for non-resident foreign currency deposits of 3- to 5-year maturities raised by banks through September 30.

“The (RBI) measures strengthen the ability to mobilise stable, longer-tenor deposits,” said Ajay Kumar Srivastava, MD & CEO at Indian Overseas Bank.

More room to fall

Abhishek Bisen, head of fixed income at Kotak Mutual Fund, believes that CD rates could fall further.

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“Current CD yields continue to price in a significant degree of monetary tightening and have room to ease,” said Bisen.

The spread between the three-month treasury bill yield and a CD of similar maturity issued by state-run lenders was at 140 bps on Thursday, down from a six-year high of more than 200 bps three months ago.

“Over the next three months, we see the spread normalizing towards 100 bps, driven by lower CD issuance requirements,” Bisen added.