Mumbai: State Bank of India (SBI) on Wednesday increased rates on term deposits by 10-75 basis points (bps), which may prompt other banks to follow suit, and signals the turning of interest rate cycle.

The country’s largest lender increased the interest rate on fixed deposits (FD) for a two- to three-year maturity to 6.50% from 6% a year. One basis point is one-hundredth of a percentage point.

Bankers and analysts attributed the reason for the increase in deposit rates to tight banking system liquidity conditions. The Bloomberg Banking Liquidity Conditions Index showed a liquidity deficit of Rs34,000 crore as on Tuesday. In the past three months, SBI had twice raised rates on bulk deposits. However, this is the first time after demonetisation that the bank has raised term deposit rate on amounts below Rs1 crore.

“It is to do with the demand and supply of money. In the past few months, liquidity has been tightening in the system. If you just look at the commercial paper and certificate of deposit rate, you have seen a movement of 100 bps. Thanks to the liquidity getting tight, market borrowing has become tighter, too. Typically, in the last quarter of the year, demand increases. SBI, in fact, post-demonetisation had dropped their rates. Most banks are aligning themselves to market rates and to demand and supply of money," said Shanti Ekambaram, president-consumer banking, Kotak Mahindra Bank Ltd.

When SBI increases FD rates across tenure, it means the change is here to stay for a longer period, and that other banks are likely to follow.

“I think liquidity is getting tighter for SBI and other banks, too. The room for other banks to increase deposit rates is also there. Some small banks may not increase rate. However, other majors may follow the trend and increase deposit rates, but it will also depend on their liquidity situation," said Pritesh Bumb, an analyst at Prabhudas Lilladher Pvt. Ltd.

When banks raise deposit rates, it indicates lending rates will also tighten. “It is a function of tightening liquidity which has happened due to both monetary and fiscal measures. As a result of that, banks require to raise deposit rates. When deposit rates were going down, MCLR (marginal cost of funds-based lending rates) fell. Now when deposit rates rise, MCLR is bound to go up," said Rajiv Anand, executive director of retail banking at Axis Bank Ltd.

The rise in SBI deposit rates, and subsequently lending rates also signals the turning of the interest rate cycle despite the Reserve Bank of India (RBI) not making any rate changes in its last two monetary policy reviews.

Indeed, one member of RBI’s monetary policy committee (MPC) said a series of rate hikes may be warranted because of rising risks to inflation, while others hinted at a change in policy stance if those risks materialize, show minutes of the February meeting released on Wednesday.

“The trend indicates hardening of interest rate on both sides of the balance sheet—deposits as well as loans. As far as lending rates are concerned, there is gradual recognition that external conditions such as inflation from oil and possibly from food till the monsoons may push the interest rates up," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

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