DBOD No. BP.BC . 43 / 21.03.053/ 2002-03

16 November 2002

All Scheduled Commercial Banks
(excluding RRBs & LABs)

Dear Sir,

Mid-Term Review of Monetary and Credit Policy 2002- 03
Certificates of Deposit

Please refer to paragraph 87 regarding Certificates of Deposit (CDs) in the Governor's 'Statement on Mid-term Review of Monetary and Credit Policy for the year 2002-03' enclosed with letter No. MPD.BC.222/ 07.01.279/ 2002-03 dated October 29, 2002.

2. As per extant instructions, CDs are required to be issued at a discount to face value and the issuing bank is free to determine the discount rate. With a view to providing more flexibility, CDs may also be issued as a coupon bearing instrument now. In order to give additional choice to both investors and issuers, it has, therefore, been decided that banks may issue CDs on floating rate basis provided the methodology of computing the floating rate is objective, transparent and market-based.

3. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. The standard procedures and documentations in this regard would be issued separately by FIMMDA in consultation with market participants.

4. Please acknowledge receipt.

Yours faithfully,

( M. R. Srinivasan)
Chief General Manager-in-Charge