Competition may push deposit rates up over 100 bps by December: Bankers

Banks are bracing for another round of increase in interest rates, especially in garnering deposits amid stiff competition, with the market pencilling in at least a 50-basis-point (bp) hike in the repo rate in the monetary policy review next week.

Bankers said while policy rates could rise by at least another 50 bps, the chase for deposits could see interest rates on term deposits, including big ticket certificates of deposit (CDs), grow by over one per cent (100 bps).

Credit offtake was high in the June quarter, a period that is generally seen as being soft because of lower demand, widening the gap between credit and deposit growth, which is putting more pressure on resources. While bank credit expanded by 14.4 per cent year-on-year (YoY) till July 1, deposits grew by 9.8 per cent YoY.

Rating agency ICRA in a recent report said with deposit growth still lagging, the liquidity surplus for banks is expected to decline further in the coming months, thereby pushing them to aggressively start chasing deposits, which will also lead to higher deposit rates.

There is, however, room for the deposit rates to rise, with the average one-year deposit rate for banks standing at 5.41 per cent. This is much lower than the 6.4-6.5 per cent rate seen before the outbreak of the Covid-19 pandemic.

Anil Gupta, sector head of financial sector rating, ICRA said the extent of hike will also depend on RBI's guidance on repo rate. If a one-year treasury bill could fetch a 7 per cent rate by December 2022, then a term deposit of the same maturity must get a rate higher than seven per cent.    

Another factor at play is the Reserve Bank of India’s (RBI’s) liquidity management operations, which are sucking out excess money in the system to tame inflation. The systemic liquidity of banks has remained in surplus at Rs 2.9 trillion as on July 20, though it has declined from Rs 7.1 trillion as on April 1.

Besides taking out excess money, the RBI raised the repo rate by 90 bps to 4.9 per cent in May and June. Assuming the RBI is successful in taming price rise, there is a case for the repo rate to settle between 6.25 per cent and 6.75 per cent — and then hope that the base effect kicks in next fiscal, another rating agency CRISIL said.

The pressure on banks to hike deposit rates is quite palpable as they have been quite cautious in spelling out the extent of the rise in interest rates and their strategy. No one wants to be seen as leading the rate war even while remaining in the competition. This is clear from commentary on analysts’ calls after the June quarter results.

Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, said as a result of competitive pricing the bank would have to look at certain rivals to see that it is relevant in the market. It does not want to be the price leader, but at the same time it wants to be competitive within a certain range.

Similarly, in the case of Axis Bank, Ravi Narayanan, group executive – retail liabilities, branch banking and products, said the bank does not want to be the leader as of now. It will wait and watch and see how the competition moves, he said.