Deposit rates may rise 50-100 bps in H2: Crisil

A stronger credit growth in the busy season may intensify competition among banks to raise resources, pushing up deposits rates by 50 to 100 basis points, according to Crisil Ltd.

The rates for short-term bulk deposits, which are more sensitive to liquidity, could see a rise of up to 100 basis points. Banks continue to issue certificate of deposits and raise fresh wholesale deposits to meet funding requirements, leading to significant increases in the pricing of these instruments.

The projected rise of 50 basis points in term deposits will be over and above what banks have already done, Suman Chowdhury, head, Crisil Ratings said.

The response of banks to the steady monetary tightening policy by the Reserve Bank of India has been measured and gradual in the first half of the financial year to September. However, the rise in rates could be sharper between October and March given the strong expectations of a healthy pick up in credit demand, Crisil said in a statement.

The credit off-take will be substantially higher in the second half of 2010-11 since credit demand in India is by nature back-ended, in the event of the festive and agricultural harvest seasons during this period, it said.

Banks have sanctioned loans to a many large infrastructure projects, which have obtained the necessary approvals and mobilised equity, and may now begin to draw down loans. The steady growth in the Index of Industrial Production also indicates that the manufacturing sector may soon look to put capital expenditure programmes on fast track. There will also be an increase in working capital requirements.

Crisil said firming of deposit rates has begun to gather momentum with several banks increasing both their deposit and lending rates in the first week of October.

Since March 2010, RBI has raised the repo and reverse repo rates by 100 and 150 basis points, respectively, primarily in response to inflationary pressures in the economy. Now the repo rate, or the rate at which RBI lends money to banks, is six per cent while the reverse repo rate, rate at which RBI accepts funds, is five per cent.

Bank deposit rates have risen, on an average, by only 50 basis points during the first half. Clearly, the increase in benchmark rates are yet to be fully transmitted. This is so because bank credit has grown by 4.3 per cent (around Rs 1,40,000 crore) in the five months ended September 10. It is much higher than the 1.3 per cent growth that was witnessed in the same period last year.