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4. CERTIFICATES OF DEPOSITS MARKET

After treasury bills, the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs.

Allowed in 1989, CDs were one of RBI's measures to deregulate the cost of funds for banks and FIs. A CD is a negotiable promissory note, secure and short term (upto a year) in nature. A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. Though RBI allows CDs upto one-year maturity, the maturity most quoted in the market is for 90 days.

The secondary market for this instrument does not have much depth but the instrument itself is highly secure.

CDs are issued by banks and FIs mainly to augment funds by attracting deposits from corporates, high net worth individuals, trusts, etc. the issue of CDs reached a high in the last two years as banks faced with a reducing deposit base secured funds by these means. The foreign and private banks, especially, which do not have large branch networks and hence lower deposit base use this instrument to raise funds.

The rates on these deposits are determined by various factors. Low call rates would mean higher liquidity in the market. Also the interest rate on one-year bank deposits acts as a lower barrier for the rates in the market.