Certificate of Deposit
A Certificate of Deposit (CD) is a negotiable, unsecured, short-term money market instrument issued by scheduled commercial banks and select all-India financial institutions to raise funds from the money market. CDs are issued at a discount to face value and redeemed at par, with maturities ranging from 7 days to 1 year for banks.
Certificates of Deposit serve as the bank-side counterpart to Commercial Paper: while CP is issued by corporates, CDs are issued by banks to raise short-term funds from institutional investors when the cost of CDs is lower than attracting retail fixed deposits. Banks resort to CD issuances particularly during periods of liquidity tightness — when deposits are growing slowly relative to credit demand — as a way to quickly access large amounts of institutional money. The RBI regulates CD issuances under its master directions on money market instruments and sets guidelines on the minimum denomination (Rs 1 lakh and multiples thereof), eligible issuers, and the prohibition on repurchase (repo-ing) CDs in the secondary market.
CDs are typically held by money market mutual funds, insurance companies, provident funds, and corporate treasuries. Unlike fixed deposits, CDs are issued in dematerialised form and are freely transferable — meaning an investor can sell a CD in the secondary market before maturity, though secondary market liquidity varies. This tradability distinguishes CDs from traditional bank fixed deposits, which, while sometimes premature-withdrawable, do not have an active secondary market.
The pricing of CDs reflects the issuing bank's credit quality and prevailing money market conditions. CDs from large public sector banks like SBI or private sector banks like HDFC Bank historically priced very close to the T-Bill yield or the repo rate, reflecting their near-zero credit risk. CDs from smaller private banks or cooperative banks priced at higher spreads, compensating investors for the additional credit and liquidity risk. Post-YES Bank's distress in 2020 and the RBI's imposition of moratorium, investors became acutely sensitive to bank CD creditworthiness.
For retail investors, CDs are not directly accessible in the same way that bank FDs are — the minimum denomination and wholesale market structure keeps them as institutional instruments. However, investors indirectly benefit from CD exposure through liquid mutual funds and ultra-short-term debt funds, which regularly allocate a portion of their portfolios to high-quality bank CDs to enhance yield while maintaining liquidity.