Certificates of Deposit

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Case Details:

Case Code : FINC065
Case Length : 13 Pages
Period : 2010-2011
Pub. Date : 2011
Teaching Note : Not Available
Organization : -
Industry : -
Countries : India; Global

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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“CDs bids are accepted only if there is large liquidity demand in the form of credit or for meeting large redemptions. The fund sell-off of CDs, in turn, resulted in pushing up CD yields in the secondary market.” ¹

- C. Shivkumar , The Hindu Business Line, November 2009.

“Subscription to the CDs was mostly from cash surplus corporates, both private and in the public sector.”²

- A Trader, The Hindu Business Line June 2010.

Introduction

The months of May and June 2010 saw a huge sale of Certificates of Deposit (CDs). Mutual Funds (MFs) companies began to liquidate their holding in the face of the “Euro Crisis”³ to meet the obligations of the Foreign Institutional Investors⁴ (FIIs). As the fund houses had redeemed huge quantities of CDs, the interest rate of six-month CDs went up steeply to 6.3%. In May 2010, FII took a short position of Rs. 94.36 billion of equities and a long position in debt portfolio amounting to Rs. 24.50 billion from the point of view of short-term liquidity.⁵ The buyers of the CDs during this period were banks, who took a long position at a steep discount.

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1] C. Shivkumar, “CD Rates Likely to Plunge as Credit Growth Remains Low,” The Hindu Business Line, November 5, 2009.

2] C. Shivkumar, “Mutual Funds Liquidate CDs to Tackle Redemption Pressure,” The Hindu Business Line, June 7, 2010.

3] The Euro Crisis occurred (?) when the bond yield spreads and risk insurance on credit default swap escalated among member countries of the European Union -- Belgium, Greece, Ireland, Italy, Portugal, and Spain.

4] FIIs are large investors in MFs, particularly in the debt markets schemes. FIIs are not allowed to invest directly in CDs.

5] C. Shivkumar, “Mutual Funds Liquidate CDs to Tackle Redemption Pressure,” The Hindu Business Line, June 7, 2010. During May 2010, Rs. 94.36 billion = US$ 2.4 billion and Rs. 24.50 billion = US$ 535 million.