Whalesbook
CSB Bank, for instance, offered 8.32% for a 91-day Certificate of Deposit (CD), while Ujjivan Small Finance Bank and Equitas Small Finance Bank also raised funds at competitive rates like 8.25%. HDFC Bank and IDBI Bank paid 7.6% for short-term 33-day funds. While some rate increases are typical at year-end, analysts note the current spike extends beyond seasonal factors, indicating banks are under significant pressure to secure capital. This forced increase in funding costs signals a shift towards prioritizing immediate funding certainty over cost control.
This situation is driven by deeper structural issues in the Indian banking system. Systemic liquidity has tightened considerably, dipping into deficit territory earlier this year partly due to tax outflows and currency market interventions. This liquidity crunch is exacerbated by credit growth outpacing deposit growth; by February 2026, credit had expanded by 13.7% year-on-year, while deposits grew by only 10.9%, pushing the loan-to-deposit ratio to a high 82.5%. Consequently, banks are increasingly tapping more expensive wholesale funding sources. The spread between three-month CD rates and Treasury bills has widened to 210 basis points, the highest since March 2020, indicating scarce liquidity and increased funding risk. Outstanding CD volumes have surged to a record ₹6.64 trillion as of February 2026, a 75% jump in two years.
The increased cost of these CDs directly impacts banks' Net Interest Margins (NIMs). Fitch Ratings forecasts sector margins could decline by 20-30 basis points below their 3.1% forecast for FY27 if funding costs remain elevated. The Reserve Bank of India faces reduced flexibility in injecting liquidity, partly due to efforts to stabilize the rupee amidst global geopolitical tensions, which also contribute to draining liquidity and raising fund costs. This pressure is compounded as household savings increasingly move towards mutual funds and equities, eroding the base of stable, low-cost funding and making banks price-takers in the wholesale market.
Experts anticipate CD rates will not soften significantly in FY27 despite potential moderation from recent peaks, due to persistent structural issues like the credit-deposit mismatch. Analysts at Nomura have revised NIM estimates lower across the sector, suggesting recovery might be delayed and shallower than previously expected. Moody's Ratings flags intensified competition for deposits as a key pressure point that could push up funding costs for some lenders next year. This environment means banks must navigate balancing costlier funding with maintaining profitability.