Banks rush out deposit rate hikes in scramble for cash

SBI’s interest rates increased by 25-50 bps for different tenors. (Reuters)
SBI’s interest rates increased by 25-50 bps for different tenors. (Reuters)


  • System liquidity deficit has widened following tax outflows and tepid government spending

A number of large and mid-sized banks raised term deposit rates in December, luring customers to park surplus money with them as the system liquidity deficit widened following tax outflows and tepid government spending.

Some banks raised rates for deposits up to 2 crore; others raised rates for bigger deposits. Top lenders State Bank of India (SBI ) and Bank of Baroda (BoB) increased rates on fixed deposits by 25-50 basis points (bps) and 10-125 bps, respectively, for different tenors on 27 and 29 December.

A basis point is one-hundredth of a percentage point.

A banking system liquidity crunch has sparked the rate hikes. Liquidity has remained in deficit since mid-September, with some days of surplus in between. According to Bloomberg data, the deficit widened to 2.6 trillion on 21 December, the highest in 2023.

The liquidity situation is expected to improve as government spending picks up. Kotak Institutional Equities said in a note on 26 December that the government has adequate room to spend in the January-March quarter; it expects the government to run down on its cash balance in the coming months.

From May 2022 to November 2023, the weighted average deposit rate increased by 213 bps on fresh deposits, as per Reserve Bank of India (RBI) data.

Bankers said their asset-liability management committees are figuring out which buckets need more funds.

“The asset-liability management committee decides whether funds are available for a particular deposit tenor or not. When we do a maturity analysis of our deposits, we see where the gap is or where there could be a gap when outflows happen on maturity," said a senior official at a bank that raised deposit rates in December.

“Going forward, there will be more such rate changes in various buckets," he said on condition of anonymity.

Others see this as a direct fallout of the liquidity crunch.

“The high liquidity deficit in the banking system, whereby banks are borrowing almost 3 trillion of short-term funding from RBI under the MSF (marginal standing facility) and VRR (variable rate repo) window at 6.7-6.75%, has prompted banks to hike deposit rates, especially on the shorter tenor maturities of up to six months," said Anil Gupta, senior vice-president and co-group head of financial sector ratings, Icra Ltd.

Gupta said the deposit rate hikes are expected to be limited to 20 bps on longer maturity deposits as the banks will not contract high-cost deposits for longer maturity amid expectations of rate cuts next year.

A section of the market expects RBI to start lowering rates from 2024. After raising the repo rate by 250 bps between May 2022 and February 2023, the central bank has held the repo rate at 6.5% for the past five monetary policy meetings.

According to Gupta, while deposit rate hikes will result in upward repricing of the deposit base, the increase in lending yields will be limited to loans that are linked to the marginal cost of funds-based lending rate (MCLR), an internal pricing benchmark. That’s because the repo-linked loans are unlikely to be priced upward like the benchmark it tracks.

Other experts pointed out that although the differential between the pace of credit and deposit growth has narrowed, credit growth continues to outpace deposit growth and banks have continued to raise rates in a bid to attract deposits.

Crisil Ratings Ltd expects the trend of deposit rate hikes to continue, and while credit growth is expected to be lower than in FY23, it remains healthy and this should continue into FY25 as well. That apart, lenders are also likely to see a compression of their net interest margins, given the increasing cost of funds in the form of deposits.

“We believe that net interest margins (NIMs) for the banking sector have peaked," said Subha Sri Narayanan, director, Crisil Ratings.

Narayanan said that as the recent deposit rate hikes come into effect not only for incremental deposits, but also where deposits come up for repricing (typically in the range of 30-35% in a year), overall deposit costs will rise.

“And given the repricing on the assets side has already been done, this could have an impact on NIMs to the extent of 10-20 bps. However, from an overall banking sector profitability perspective, benign credit costs should continue to provide an offset," he said.

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.