Banks Leverage CDs Over Term Deposits to Manage Resource Costs
A tactical shift toward wholesale funding instruments allows lenders to mobilise resources while maintaining stability in retail deposit pricing.
- Net incremental CD issuance reached ₹19,905 crore in October.
- Weighted average rates for CDs have climbed to 6.93%.
- Banks are prioritising wholesale instruments over raising retail term deposit rates to protect NIMs.
- Liquidity management is shifting toward short-to-medium term market instruments.
Strategic Substitution in Resource Mobilisation
Indian banks are currently navigating a complex liquidity environment by opting for Certificates of Deposit (CDs) as a primary tool for resource mobilisation. This shift suggests a preference for wholesale market instruments over the traditional route of increasing retail term deposit rates. By relying on CDs, lenders can address immediate funding requirements without committing to the long-term cost increases associated with raising interest rates across their retail deposit bases.
The decision to hold term deposit rates steady while increasing CD issuances indicates a tactical approach to Asset-Liability Management (ALM). This allows banks to tap into market liquidity selectively. As the weighted average rate for these instruments trends upward, it reflects a competitive but controlled environment for wholesale funding compared to the broader retail market.
₹19,905 crore
Net incremental CD issuance in October
6.93%
Weighted average rate for CD issuance
Protecting Net Interest Margins (NIMs)
For Treasury and Asset-Liability Committee (ALCO) heads, the primary objective of this pivot is the preservation of Net Interest Margins. Raising retail term deposit rates is often a 'sticky' move; once rates are increased, they are difficult to lower quickly without affecting deposit growth or customer sentiment. In contrast, CDs offer a more flexible, market-linked mechanism for fund raising.
The current data suggests that banks are willing to absorb a higher weighted average rate on CDs to avoid a broader 'rate war' in the retail segment. This strategy limits the cost of funds to specific tranches of wholesale capital rather than repricing the entire liability side of the balance sheet.
Wholesale funding via CDs acts as a surgical tool for liquidity, preventing the broad-based margin compression that follows retail rate hikes.
Toolyt Pulse analysis
Liquidity Dynamics and Market Response
The surge in CD issuance occurs against a backdrop of fluctuating liquidity. While the system may show a surplus, the distribution of that liquidity across the banking sector is often uneven. Larger public and private sector banks may use CDs to fine-tune their liquidity coverage ratios (LCR) without the operational lag time required for retail deposit campaigns.
This reliance on market instruments also suggests that banks are closely monitoring the cost of capital in the short-term money markets. The rise in the weighted average rate to 6.93% indicates that while liquidity is available, it is becoming incrementally more expensive, prompting a disciplined approach to how much capital is raised and at what frequency.
Implications for Retail Deposit Growth
By keeping term deposit rates unchanged, banks are essentially signalling that they are not currently in a desperate race for retail deposits. This could be due to sufficient existing buffers or a calculated move to wait for clearer signals from the central bank regarding the interest rate cycle.
However, this strategy carries the risk of slower retail deposit growth if inflation or competitive pressures drive savers toward other financial assets. Banks must balance the immediate benefit of lower cost-of-funds with the long-term necessity of maintaining a stable, granular retail deposit base.
- Monitor retail deposit outflow trends if rates remain stagnant.
- Assess the impact of wholesale funding costs on overall weighted average cost of funds (WACF).
- Evaluate the maturity profile of new CD issuances to avoid bunching of repayments.
What this means for execution
As banks shift toward wholesale instruments like CDs, the pressure moves from retail branch networks to treasury and corporate banking desks. For field teams and branch managers, the lack of rate hikes means the value proposition to customers must shift from 'price' to 'service and experience.' Execution will require sharper focus on operational efficiency and cross-selling to maintain profitability per customer.
Toolyt helps banks manage these shifting priorities by automating field workflows and lead management, ensuring that even in a static-rate environment, sales teams can maximise productivity and customer retention through data-driven execution. As banks optimise their funding mix, maintaining a lean and responsive field force becomes a critical competitive advantage.
Frequently asked questions
Why are banks preferring CDs over increasing term deposit rates?
Banks use CDs to mobilise resources tactically without the long-term commitment of repricing their entire retail deposit base, which helps in protecting Net Interest Margins (NIMs).
What was the scale of CD issuance in October?
There was a net incremental issuance of ₹19,905 crore in October, indicating a significant reliance on the wholesale market for funding.
How does this affect the cost of funds for banks?
While the weighted average rate for CDs has risen to 6.93%, it remains a more controlled way to manage costs compared to a broad-based increase in retail term deposit rates.
This briefing is written by the Toolyt Pulse desk with AI assistance, based on publicly reported Indian BFSI news. Facts and figures are limited to what the cited source reports; everything else is clearly framed as analysis. We do not publish unverified numbers, forecasts presented as fact, or quotes that were not reported. Primary source: The Hindu BusinessLine Money & Banking. Spotted something inaccurate? Write to hello@toolyt.com.