In a move that has caught the attention of financial markets, the State Bank of India (SBI) has turned to the short-term debt market to raise a significant sum, underscoring the persistent tightness in liquidity and the ongoing struggle for deposits within the Indian banking system. On Wednesday, the country's largest lender raised approximately ₹6,000 crore through certificates of deposit (CDs) at an interest rate of 6%, according to information from five fixed-income traders.
A Rare Move by the Banking Behemoth
SBI's foray into the CD market is considered unusual, signaling the growing pressure banks face in mobilising deposits to fund the continuing strong credit demand across the economy. The funds were secured through instruments maturing in March 2026. This is only the second such instance in recent times, with SBI last raising ₹1,650 crore via CDs in November 2024.
Killol Pandya, Head of Fixed Income at JM Financial Asset Management, noted the significance, stating, "State Bank of India tapping the CD market, that's rare, isn't it? I think they came, so it kind of underscores the point that supply is quite robust in the shorter end and credit off-take is well but deposits are a challenge." He added that while the amount is not massive relative to SBI's balance sheet, the act of raising short-term funds itself is noteworthy.
The Widening Loan-Deposit Gap
The banking sector is currently navigating a clear imbalance. The latest data from the Reserve Bank of India (RBI) shows that non-food credit growth remained healthy at 12% year-on-year as of the end of December, driven by consumption and regulatory reforms. In stark contrast, deposit growth has lagged, recording just over 9%. This disparity is widening the critical loan-deposit gap, forcing banks to explore costlier avenues for funds.
The stress is evident in the pricing. SBI's three-year CD issuance at 6% is roughly 90 basis points higher than the 5.1% interest it offers on bulk deposits of 46–179 days for the general public. Other banks followed suit on the same day. Union Bank of India raised ₹200 crore via papers maturing in May at 6.45%, while the Small Industries Development Bank of India (SIDBI) mobilised ₹4,500 crore through one-year paper at 6.95%.
Market Liquidity and Future Pressure
The pressure is not solely due to deposit struggles. A liquidity crunch in the system, mutual fund selling, higher-than-expected Treasury bill cut-offs, and robust supply have collectively pushed up rates at the short end of the debt market. Yields on CDs rose by 10–15 basis points to around 6.50%, while commercial paper yields climbed 5–10 basis points to about 6.60%.
A senior treasury official explained the situation, saying, "Liquidity has technically moved into a marginal surplus, but remains far from comfortable. We are averaging about ₹60,000 crore a day, which is just bare bones. It's a far cry from the ₹2.5–3 trillion we had some days ago." As of 6 January, the banking system's liquidity surplus stood at ₹80,134 crore, a sharp increase from ₹23,865 crore on 1 January, but market participants argue this is not sufficient.
Outstanding CD issuances stood at ₹5.7 trillion at the end of November, up from ₹4.9 trillion a year earlier, reflecting the strong supply. Market experts anticipate the pressure on short-term rates will persist unless the RBI materially improves liquidity conditions through mechanisms like open market operations (OMOs). The treasury official summed it up: "They (RBI) will have to inject more liquidity… Otherwise, it's going to be difficult."
