Three-month CD rates have already spiked above 7% and are currently trading around 7.10%. That compares with around 6% rate banks were borrowing at the end of December, latest market data showed.
Although demand for funds picks up generally at the end of the fiscal year, things are a little different in 2026 as banks are also grappling with a high, liquidity-straining credit deposit ratio. The current system-wide credit-deposit ratio is around 82%, the highest ever for the banking industry.
Bankers expect rates to remain elevated with chances that the three-month CD, which is the most used instrument by banks to pick up funds, could go up to 7.50% if demand for loans remains strong.
“It all depends on how much surplus liquidity is there in the system. CDs rate typically pick up during the end of the fiscal year, and this year will be no different. The bias is no doubt towards CD rates going up with the probability that rates will ease by the end of March almost nil,” said Alok Singh, head of treasury, CSB Bank. “One other factor to watch out for is how much of a surplus debt mutual funds have because these are the funds that ultimately invest in bank instruments.”
Association of Mutual Funds in India (AMFI) data shows that debt funds had net inflows of ₹74,827 crore in January after an outflow of ₹1.32 lakh crore in December. Banking system liquidity has remained in the ₹2.50 lakh crore range in February indicating comfortable short-term funding conditions. However, banks step up lending in the last month of the fiscal to meet growth targets increasing funding pressures.”CD rates have already firmed up in the last couple of months and in the last month of the fiscal as banks step up lending, rates could inch higher. We expect pressure on CD and bulk deposit rates all through March. The problem will be more acute this year as loan to deposit ratio is high and banks are also sitting on lower liquidity coverage ratio (LCR). This is creating a double challenge for banks while funding credit growth,” said Anil Gupta, co- group head, financial sector ratings at Icra.
Credit deposit ratio in the banking system remains around 82% underscoring the struggle for banks to raise deposits. This year unlike last year, banks are also dealing with a lower LCR, a Basel III regulatory standard requiring banks to hold enough high-quality liquid assets (HQLA)-such as cash or government securities-to meet short-term obligations during severe market stress. Banks will also have to deal with system outflows linked to the GST in the middle of March.