Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

Is RBI’s cash pump finally infusing confidence in banks?

ICICI Bank has reduced interest rates on bulk deposits by 15-25 basis points across maturities, with effect from Tuesday

Mumbai: India’s lenders have begun paring their bulk deposit rates, an indication that banks are becoming confident on liquidity after the Reserve Bank of India’s promise to bring the deficit to near neutral levels.

The country’s largest private sector lender ICICI Bank Ltd cut the interest rates on its bulk deposits by 15-25 basis points (bps) across maturities on Tuesday, the second reduction in bulk deposit rates in calendar 2016. The bank had reduced the interest rate on bulk deposits by up to 55 bps on 31 March.

A basis point is one-hundredth of a percentage point, or 0.1%.

The interest rates on deposits with maturities between 91 and 184 days have been reduced by 25 bps to 6.75%, from 7% earlier. Similarly, the interest rate on deposits with maturities in the range of 271-330 days has been reduced by 15 bps to 7.25%, from the earlier rate of 7.4%.

Others who have pared bulk deposit rates ever since the RBI announced its liquidity stance are IDBI Bank Ltd, Oriental Bank of Commerce and Vijaya Bank.

Bulk deposits, or deposits of more than 1 crore, as defined by the central bank, are a bank’s resort to source large scale funds and typically pay a slightly higher interest rate than retail term deposits. The rates are more susceptible to revisions compared with retail term deposits and, therefore, more responsive to RBI’s liquidity measures.

“More liquidity into the system and the demand for liquidity is less in terms of credit, then the transmission is bound to be faster to deposits," said N.S. Venkatesh, chief financial officer at IDBI Bank.

“Liquidity is going towards being neutral, which is a big change in the stance of the RBI. And as we see this, and if credit growth doesn’t pick up much, automatically deposit rates will fall," Venkatesh said.

Besides these, rates on certificates of deposit (CDs) which are tradable instruments that banks raise funds from have dropped by 30-40 bps across tenures over the last one month. CDs typically enable a bank to raise more than 10 crore through a single deal and the rates are market determined.

But banks have been pruning their CD base to reduce reliance on high-cost deposits. In fiscal 2016, the outstanding CDs that banks held fell by 84,000 crore, data from RBI shows.

The RBI on 5 April, said that it would use a combination of dollar purchases and government bonds to infuse liquidity towards a targeted neutral position, a decisive shift from its earlier stated objective to keep liquidity in a deficit of up to 1% of bank deposits.

The central bank has since then pumped in 30,000 crore by buying government bonds through open market operations. It has also continued to buy dollars in the foreign exchange market.

Bankers said that as liquidity improves, deposit rates across the spectrum would drop more.

But what is aiding the impact of the RBI’s liquidity infusion on deposit rates is the slack credit growth.

With banks seeing no strong demand for loans, the incentive to go after depositors aggressively is less, said Venkatesh.

Growth in loan offtake remained 10-11% even in the first fortnight of fiscal 2017. Most bankers do not see a sharp pick-up in loan growth this year as well.

As deposit rates ease, this will flow through into lending rates, albeit slowly. Earlier this week, State Bank of India reduced its marginal cost lending rate by 5 basis points.