MUMBAI: Tightened liquidity conditions have prompted banks to raise deposit rates faster than initially expected. During the week, several lenders, including HDFC Bank, Punjab National Bank, Canara Bank and Bank of India, increased their fixed deposit rates.
Punjab National Bank increased deposit rates by 10 basis points for the 444-day tenure and 50 bps for the 680-day tenure. Canara Bank has hiked deposit rates by 15 bps across select tenures, raising rates to 6.40% for one year to 15 months, 6.65% for 444 days and 6.75% for 555 days. HDFC Bank raised deposit rates by 15 bps to 5.65% for tenures of six months and one day to nine months, and to 6.90% for tenures of nine months and one day to less than a year. It also increased rates by 5–10 bps across other select tenures.
“The transmission of repo rate hike on the deposits was initially expected to be gradual, supported by surplus liquidity from FCNR(B) inflows. However, a sharp decline in system liquidity following the RBI’s liquidity absorption measures and festive-season demand has prompted some banks to raise deposit rates in select buckets,” said Sachin Sachdeva, vice president and sector head at ICRA.
The Reserve Bank of India (RBI) began the rate hike cycle with 25 bps in the October policy and banks had limited need to raise deposit rates earlier as they continued to enjoy surplus liquidity.
However, the RBI has absorbed liquidity through measures such as open market operations, forex swaps and higher daily CRR maintenance requirements.
“The liquidity from FCNR(B) deposits was concentrated among a few banks and the RBI absorbed excess funds through various measures. This, coupled with strong credit demand, is pushing banks to raise deposit rates much faster,” said a banker with a public sector bank.
Banking system liquidity averaged at Rs 1.28 lakh crore over the last two weeks compared to Rs 2.39 lakh crore in October and Rs 7.77 lakh crore in September. It was at Rs 40,318 crore in the last two weeks of October, after which the RBI stepped in with variable rate repo (VRR) to inject liquidity.
Certificate of deposit (CD) rates also surged amid tightening liquidity before easing slightly. Bloomberg data showed one-year CD rates rose 128 basis points to 7.14% in October before declining 31 bps to 6.83% in November, remaining relatively elevated.
With liquidity remaining relatively better now, the RBI has stepped up VRRR operations to absorb surplus funds. Market participants expect the central bank to maintain tighter liquidity conditions to ensure effective transmission of rate hikes.
Debadatta Chand, MD&CEO, Bank of Baroda, said they would need to gradually adjust its deposit rates if market interest rates remain elevated.
“We garnered $8 billion under the FCNR (B) scheme, so our position differs from other banks. As significant liquidity has been absorbed from the system and we are getting into busy season, deposit repricing for system may happen at a higher level. We have not done repricing as of now. If market rates remain elevated, we will have to gradually align our deposit rates depending on our liquidity requirements,” he told FE in an interview.
Chand added that this could lead to a marginal increase in the cost of deposits from the current quarter.
Banks have largely focused their deposit rate hikes on shorter tenures, with some also introducing special short-term deposit schemes. Bank of India, for instance, has launched the limited-period BOI Akshay Fixed Deposit scheme, offering an annual interest rate of 6.85%.
“We are hoping for a resolution to the Iran conflict, that would bring crude oil prices down, potentially limiting the extent of further rate hikes. While market had earlier anticipated up to 100 bps hike, this could moderate to 50–75 bps if oil prices ease. Hence, banks may prefer raising short-term deposit rates rather than locking in higher rates for the long term,” said the banker quoted above.
Source: The Financial Express
