The decision of the Reserve Bank of India to inject Rs 1.5-lakh-crore liquidity in the banking system is expected to bring down short-term borrowing costs for lenders, according to bankers.

The announcement has led to a sharp decline in certificate of deposit (CD) rates, with the one-month rate dropping by 15 basis points to 7.25% and the three-month rate falling by 10 basis points to 7.5% in just one day. The weighted average call rate eased to 6.55% on Tuesday from 6.57% on Monday.

“The RBI’s measures to address the liquidity deficit will directly benefit banks by reducing the cost of short-term funds. These measures will ease the pressure on short-term borrowing rates for instruments like certificates of deposit,” said Harsh Dugar, executive director, Federal Bank “The additional liquidity will provide much-needed relief in the current tight-liquidity environment.”  

A CD is a short-term debt instrument used by banks to mobilise funds. Fundraising via CDs has significantly risen as lenders are finding it difficult to raise funds through deposits. Banks raised a record Rs 12.34 lakh crore in 2024 via CDs, compared with Rs 8.2 lakh crore in 2023.

“The significant change in CD rates will happen only after we see funds entering into the banking system after the RBI conducts VRR auctions or open market operations next week,” said VRC Reddy, deputy general manager – treasury, Karur Vysya Bank. “Whatever change in the rates we have seen on Tuesday was mainly driven by sentiments.”

The RBI on Monday announced a raft of measures to ease liquidity condition. The measures include carrying out open market operations (OMO), conducting VRR auctions and dollar-rupee buy/sell swap auctions. The first OMO will be conducted on January 30 while the VRR auction will be held on February 7.

“VRR is a welcome announcement with the duration of the auction being extended. While this is not a durable injection of liquidity, longer tenures help banks with liquidity planning and reduce some operational hurdles,” said Nomura in a report.

Following the RBI’s announcement, shares of banks surged 1-3% on the BSE. Stocks of Canara Bank, IDFC First Bank, Punjab National Bank and Bank of Baroda rose 3% while Axis Bank, ICICI Bank and HDFC Bank increased around 2%

“This response is likely to be perceived by the markets as the RBI swinging into multi-pronged actions on the liquidity front, rather than an ad-hoc support,” said Radhika Rao, senior economist, DBS Bank. “From the rates standpoint, the immediate impact will be stabilisation in overnight rates, to keep it aligned with policy rates and to prevent tightness in financial conditions.”