Fixed Deposit rates could increase as loans outpace deposits
Bank deposit rates could see an upward push as borrowing from banks has grown at a faster pace
Mumbai, September 11: The growth in bank credit has outstripped the increase in deposits during the first five months of the current fiscal year. This trend is expected to push bank deposit rates higher, with the weighted average term deposit rates of banks rising by 27 basis points in April-August 2023.
According to data from the Reserve Bank of India (RBI), bank deposits increased by 6.6 per cent to reach Rs 149.2 lakh crore in April-August 2023. During the same period, growth in bank credit surged by 9.1 per cent to reach Rs 124.5 lakh crore. These figures take into account the merger of HDFC with HDFC Bank, which widened the credit-deposit gap due to the lower deposits of the housing finance company compared to its loans.
In absolute terms, banks have added Rs 11.9 lakh crore in deposits while their loan books have grown by Rs 12.4 lakh crore. The divergence between credit and deposit growth has been managed because of the surplus investments by banks in government securities.
According to CareEdge Ratings, credit growth for the current financial year is expected to be in the range of 13-13.5%, excluding the impact of the HDFC merger. The rating agency also noted that banks are likely to expand their branch networks to ensure that deposit growth does not impede credit offtake.
Madan Sabnavis, the chief economist at Bank of Baroda, pointed out that the difference between credit and deposit growth is reflected in the liquidity in money markets. He added that it is not surprising that the cost of deposits increased in July based on RBI data, which is likely to have persisted in August as well.
The weighted average term deposit rate of banks has risen from 6.28% in April to 6.55% in July 2023.
Last week, Punjab National Bank (PNB) raised interest rates on term deposits by 25 basis points (100 basis points = 1 percentage point). Currently, small finance banks offer the highest term deposit rates, with Unity Small Finance Bank offering 9 per cent on 1001-day deposits. Among Indian private banks, DCB Bank offers 7.75 per cent on deposits ranging from 25 to 37 months. Punjab & Sind Bank's 7.4 per cent deposit rate is the highest among public sector banks.
Economists believe that one of the critical determinants of future deposit rates will be liquidity leakages due to cash withdrawals. There is concern that the increase in current and savings account deposits due to the withdrawal of Rs 2,000 banknotes may be temporary.
In the short term, liquidity is expected to come under pressure in mid-September due to advance tax outflows, which are likely to exceed the Rs 25,000 crore released by the RBI from the incremental cash reserve ratio requirement.
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