Banks likely to curb pace of deposit rate hikes in near term

By Piyush Shukla

Banks are likely to reduce the pace of deposit rate hikes in the near term on account of abundant liquidity in the banking system, lower credit offtake, and the Reserve Bank of India (RBI) maintaining its key lending rates at 4%.

At present, the country’s largest lender, State Bank of India, offers interest rates between 2.90% and 5.50% per annum on tenors ranging from seven days to 10 years on retail domestic term deposits below Rs 2 crore. Similarly, large private sector lender HDFC Bank is offering rates between 2.50% and 5.60% on various tenors ranging from seven days to 10 years for deposit accounts with lower than Rs 2 crore outstanding amount.

“Had the RBI taken a call (of repo rate hike), banks could have increased deposits rate faster at the shorter tenor deposits. Our sense is that the pace of deposit rate hike could become more gradual now compared to what it could have been had the RBI raised the rates,” said Prakash Agarwal, director and head of financial institutions at India Ratings and Research.

Lenders are also not aggressively chasing deposit growth in the near term as they are flush with liquidity and have a comfortable buffer in terms of liquidity coverage ratio, bankers said. As per RBI data, the surplus liquidity in banking system is estimated at around Rs 6.60 lakh crore. Further, scheduled commercial banks’ outstanding non-food credit as on January 28 rose to Rs 115 lakh crore from Rs 114.1 lakh crore at the end of the previous fortnight, as per RBI data, while deposits grew at nearly the same pace as loans and rose 8.31% on a yearly basis to Rs 160.33 lakh crore.

“Credit offtake is yet to pick up on expected lines. So, there is enough cushion with the banks before they are forced to increase the rates. On the other hand, credit-deposit (CD ratio) growth differential is narrowing down. So one can expect upward revision on deposit rates, at a slow pace, after normalisation of liquidity in the system,” Suresh Khatanhar, deputy managing director at IDBI Bank, told FE.

However, some analysts think slowing the pace of deposit rate hike will likely result in lenders being forced to raise rates heavily at a later stage.