Ask NiyaThe Discount and Finance House of India (DFHI) was established to promote a secondary market for various money market instruments.
Effective July 28, 1988, DFHI was permitted to operate in the call and notice money markets both as a lender and borrower.
To enhance flexibility, DFHI’s operations in the call/notice money market were exempted from the interest rate ceiling set by the Indian Banks’ Association in October 1988.
This exemption allowed partial deregulation of call money rates and contributed to overall money market stability.
On April 2, 1992, DFHI Ltd. began limited trading in dated government securities, marking a significant move toward developing a secondary market for such instruments.
To broaden the spectrum of money market instruments and enhance short-term fund deployment flexibility, Certificate of Deposits (CDs) were introduced in the first half of 1989–90.
A CD is a short-term borrowing note in certificate form — much like a promissory note — bearing a fixed interest rate, maturity date, and face value.
Generally, CDs mature in 3 months to 5 years. Funds cannot be withdrawn on demand but may be liquidated early with a penalty.
Returns on CDs are higher than Treasury Bills due to greater risk and are calculated using either Annual Percentage Yield (APY) or Annual Percentage Rate (APR):
APR uses simple interest; when interest is paid annually, both APY and APR yield the same return.
For interest paid more than once a year, APY is more beneficial than APR.
As of February 22, 1991, the outstanding amount of CDs issued by 46 major scheduled commercial banks totaled ₹3,035 crore, representing 69.2% of their revised limit of ₹4,383 crore.
From 1992–93, banks were permitted to issue CDs at market-determined interest rates to raise funds competitively.
To regulate the market, from April 17, 1993, the issuance of CDs was capped at 10% of the fortnightly average outstanding aggregate deposits (1991–92 levels).
On April 15, 1997, the minimum size of CD issue per investor was reduced from ₹25 lakh to ₹10 lakh.
Certificates of Deposit (CDs) are negotiable instruments issued either in dematerialised form or as Usance Promissory Notes, by banks or eligible financial institutions for a fixed term.
Issuance of CDs is governed by RBI directives which are updated periodically.
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