Banks have raised interest rates on bulk deposits, indicating that they are searching for such deposits to match the demand for credit since the system’s excess liquidity is decreasing and deposit growth is behind credit growth by a significant margin.
Rates for three-month corporate deposits range from 6.30% to 6.50 %, up 30-35 basis points from a week earlier, according to market participants. As a consequence of banks turning to certificate of deposits (CDs) in response to the system’s tightening liquidity, there were 2.44 trillion rupees worth of outstanding CDs as of September 9, 2022, up from 0.7 trillion rupees one year earlier, representing an increase of over 250 % YoY.
Recent data from the Reserve Bank of India (RBI) show that credit growth in the economy is at a 9-year high of 16.2% while deposit growth is only 9.5%, widening the credit-deposit growth gap and raising concerns that slow deposit growth may become one of the biggest barriers to loan growth in the system.
The benchmark policy repo rate has been increased by 140 basis points since May by the six-member monetary policy committee (MPC) of the RBI. As a result, bank lending rates–particularly external benchmarked linked loan rates have increased in lockstep with the repo rate (EBLR). According to Care Edge, the growing disparity between credit growth and deposit growth may result in supply-side problems, ultimately limiting credit expansion.
The pressure on liquidity will persist, and interest rates on liabilities (short-term deposits and term deposits) would rise, according to S K Khatanhar Suresh, deputy managing director of IDBI Bank. Deposit rates may increase by 25 basis points, based on current estimations.
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