Deposit rates to rise faster than interest on retail loans

MUMBAI: There is good news for depositors. Many banks have increased returns on fixed deposits and, according to economists, rates are set to rise even further as growth in fixed deposits at 5 per cent in FY18 has been less than half the growth in loans.
Close on the heels of SBI increasing deposit rates last week, the second largest private lender HDFC Bank has also followed suit with a hike of up to 60 basis points (100bps = 1 percentage point). Going by growth in credit demand and shrinking liquidity, more banks are expected to raise rates.

HDFC Bank’s rate revision comes less than a week after the Reserve Bank of India (RBI) hiked policy rates by 25bps in its August 1 policy review. PNB, Axis Bank and Dena Bank have also increased their rates this month.




According to a report by ratings agency Care, lending rates have traditionally grown faster than interest on deposits in a rising rate regime. Care chief economist Madan Sabnavis said in a report, “However, in the last two rate hikes, the quantum of transmission of the deposit rates is more than the lending rates. Consider the increase in interest rates of June 6 when the RBI increased the repo rate by 25bps to 6.25 per cent. From the date of announcement of the rate hike till the next monetary policy meeting, the deposit rates have increased on an average by 13bps, while the MCLR has increased by 5bps.” The MCLR, or marginal cost of lending rate, is the benchmark for all floating rate loans.

According to Sabnavis, this quicker transmission in the deposit rates can be partly attributed to the reversal of the interest rate regime witnessed in recent months. In the August 1 policy, RBI deputy governor Viral Acharya warned that liquidity will go out of the banking system in coming months as currency in circulation increases due to withdrawals during the festive season.

A report by Kotak Institutional Equities said that, after the big surge post-demonetisation, deposit growth has slowed dramatically in FY18. “Overall deposits grew 7 per cent year-on-year in FY18 (versus 11 per cent YoY in FY17), driven by current account deposits growing by 8 per cent and savings deposits by 10 per cent, while term deposits increased only 5 per cent,” the report said

Deutsche Bank claims that the cumulative yield on its five-year deposit works out to 10.09 per cent on a scheme that offers an annual return of 8.25 per cent. Jana Bank is offering 9.1 per cent to senior citizens under an inaugural fixed deposit scheme.

Meanwhile, HDFC Bank now offers 7.25 per cent on retail deposits from one to two years as against 6.65 per cent to 7 per cent earlier. For short-term rates ranging from six months to nine months, the bank now offers 6.75 per cent as against 6.35 per cent and 6.4 per cent earlier. For nine months to one year, the interest rate is 7 per cent as against 6.4 per cent earlier.

Long-term rates have not been changed much. Deposits above two years yield 7.1 per cent as against 7 per cent earlier, and on deposits above five years the rate continues to remain 6 per cent. The increase in cost of funds will eventually trigger an increase in the bank’s MCLR.

The bank’s parent, mortgage company HDFC, was the first to revise lending rates after the policy by hiking the cost of home loans by 20bps. Another private home finance provider Indiabulls has followed HDFC’s lead and increased its home loan rates by 20bps.

Interest rates are expected to firm up as credit offtake continues to be very strong. Bank credit offtake in the current fiscal has seen a year-on-year growth of 12.4 per cent as on July 20, 2018 compared with 5.8 per cent expansion seen in FY18. Deposit inflows have risen by 8.3 per cent in the current fiscal — lower than the 9.9 per cent growth a year ago.