Certificate of Deposit (CD)

A Certificate of Deposit (CD) is one of the building blocks of India's money market. When a bank needs short-term wholesale funds, it issues a CD instead of, or alongside, raising retail fixed deposits. A CD is a promise to pay a fixed amount on a fixed date, and it is fully tradeable until then.

How it works

CDs are issued at a discount to their face value. You might buy a CD with a face value of ₹5 lakh for slightly less, and receive the full ₹5 lakh at maturity. The gap is your effective interest. Because they are negotiable instruments held in demat form, CDs can be bought and sold in the secondary market before maturity.

Under RBI rules, CDs are issued in a minimum size of ₹5 lakh and in multiples of ₹5 lakh thereafter, which makes them an institutional rather than a retail product. Banks can issue CDs for tenures of 7 days up to 1 year; eligible financial institutions can go longer.

In India

The main issuers are scheduled commercial banks, small finance banks and regional rural banks. The big buyers are liquid funds, money-market funds and ultra-short-duration debt funds, which is why most retail Indians own CDs indirectly through their mutual fund units rather than directly.

CD rates tend to move with the RBI repo rate and banking-system liquidity. When liquidity tightens, banks compete for funds and CD yields rise, lifting returns on the debt funds that hold them.

Why it matters for fund investors

When you check a liquid or money-market fund's factsheet on the AMC website, you will frequently see CDs of large banks among the top holdings. They are valued for being highly liquid and low on credit risk, especially CDs of strong public-sector and large private banks.

A practical point: unlike a bank fixed deposit, a CD carries no deposit-insurance cover and its market value can move with interest rates before maturity. For a fund investor that risk is usually small, because liquid funds hold very short-dated paper. The takeaway is that CDs are a quiet, low-drama engine behind the "park your cash here" debt funds many Indians use as an alternative to a savings account.