The amount of loans that Indian banks disbursed in the first five months of the current financial year was higher than the deposits they received in the period. The bank credit rose 9.1% to Rs 124.5 lakh crore in April-August 2023, while bank deposits surged by 6.6% to Rs 149.2 lakh crore in the period, according to data released by the Reserve Bank of India (RBI). In absolute terms, the loans of banks grew by Rs 12.4 lakh crore during the five months. Banks added Rs 11.9 lakh crore of deposits during the period (these figures factor in the HDFC-HDFC Bank merger). If the trend continues, banks will be left with lower deposits and higher credit/loan demand and may need to take some actions to shore up their deposit base. As a result, will banks hike the interest rates of fixed deposits (FDs) in the short-term or long run? Let's find out what experts have to say:
Will banks hike FD interest rates now?
The recent cycle of rising interest rates on FDs, which started in May 2022, is close to its end. Many banks have started reducing FD interest rates. However, will the growth in bank credit and higher credit demand in the coming festive season drive FD interest rates further?
"When the repo rate is not changed, the decision to change deposit rates will depend on individual banks," says Madan Sabnavis, Chief Economist, Bank of Baroda. Commenting on the present situation, he adds, "Even while bank credit has grown at a faster rate than bank deposits so far, the incremental credit is still less than the incremental deposits. Therefore, there is no shortage of funds in the banking system."
Even if banks need short-term funding, they can use the excess liquidity buffer maintained in the form of statutory liquidity ratio (SLR) to bridge the gap, say experts.
Incremental CRR and its impact on fixed deposit
On August 10, 2023, RBI Governor Shaktikanta Das announced that all scheduled banks would have to maintain a 10% incremental cash reserve ratio (I-CRR) from August 12. On September 8, the RBI announced that it would discontinue the I-CRR requirement in a phased manner. The impact of the withdrawal of I-CRR will make around Rs 1 lakh crore available to the banking system in a phased manner, and that may influence short-term liquidity and rates, say experts. "With these funds coming back, overall liquidity with banks will improve and there will be less pressure to raise fresh deposits specifically for this purpose," says Sabnavis.
How will short-term FD interest rates be impacted?
Short-and medium-term deposit rates are expected to remain at their current levels, says Prashant Joshi, Managing Director & Head-Consumer Banking Group, DBS Bank India. "Bulk of the adjustment in the deposit rates due to a wedge in the deposit versus credit growth rates is behind us, which should help stabilise the rate of returns in the short term."
As credit growth picks up in the festival season, banks will have to review their deposits and deposit rates. "Interest rates of deposits and loans primarily depend on two factors — liquidity in the system and demand on the credit side. With the festive season around the corner, the demand for credit could be a little higher; however, with the decision of the RBI to release I-CRR in a phased manner, the liquidity requirement would be taken care of. Therefore, the rise in the interest rates on FDs may not happen," says Virat Diwanji, Group President and Head-Consumer Banking, Kotak Mahindra Bank Ltd.
FD interest rates hike: Not completely off the chart
The decision to increase FD interest rates will ultimately depend on the bank's balance sheet. Sabnavis says, "Individual decisions are based on how banks view their asset-liability management balances."
Even if banks increase FD interest rates, it might not be for all the tenures. It will be only for those buckets where they would like to see an increase, says Sabnavis.
Diwanji says, "The interest rates on deposits will be a function of demand for credit. There may be a marginal rise in interest rates for some buckets depending on the liquidity situation at individual banks. En masse increase in deposit rates is unlikely.”
Long-term FD interest rates may gradually rise with sustained economic growth and inflation, says Keyur Doshi, Chief Financial Officer at Fincare Small Finance Bank.
All eyes on RBI MPC meet in October
Banks consider a wide range of factors when determining interest rates of deposits and loans. "These factors include the RBI's policy stance, inflation, credit demand, and global economic conditions," says Doshi.
The RBI kept the repo rate unchanged at 6.5% since April as inflation had dropped to the central bank’s in April, May, and June. However, after a long gap, retail inflation remained higher than the upper bound of the RBI's tolerance limit of 2-6% for the second consecutive time in August. All eyes will be on the Monetary Policy Committee (MPC) meeting on October 4-6, 2023, to understand how the FD rate situation unfolds.
