Deposit rates set to touch past peaks

Banks are not ruling out the possibility of increasing retail term deposit rates further , as they struggle to raise funds amid extended tight liquidity to finance growth in loan portfolios.

Fierce competition to get depositors’ money in the last few months has seen some smaller private sector lenders offering double-digit rates. The country’s largest lender, State Bank of India, has raised deposit rates thrice since August. The bank is currently paying as much as nine per cent for 555-day and 1,000-day deposits.

Since October, deposit rates have risen 150-250 basis points on an average. “Banks will need more funds once credit demand picks up. So, more increases in deposit rates is quite possible,” IDBI Bank Chief Financial Officer P Sitaram told Business Standard. The government-owned bank will raise deposit rates by 25-125 basis points and loan rates by 25-50 basis points from tomorrow.

Loan demand
Analysts say a sharp increase in credit demand will force banks to raise deposit rates further. “With the credit-deposit ratio at a five-year high, the key to deposit rates will be credit demand. A continued pick-up in credit demand, as was observed in the fourth quarter, could put pressure on deposit rates,” JP Morgan’s India Economist Sajjid Chinoy said.

Credit growth has risen in the past few months and expanded 23.6 per cent year-on-year till mid-January. Credit growth was only 19 per cent in the first six months of the financial year. Compared to this, deposit growth has remained sluggish. The deposit base of banks had grown only 16.4 per cent till mid-January.

“The rate increase will depend on our need for funds. If the loan demand rises and (tightness in) liquidity is not corrected, there could be another 25 basis points increase in deposit rates,” said Indian Overseas Bank Chairman and Managing Director M Narendra.

While liquidity is expected to improve in the coming months due to higher government spending, it is still expected to remain in deficit, analysts say. This will exert upward pressure on deposit rates.

“In the last cycle, deposit rates rose over 10 per cent. Right now, the average rate is nine per cent. So, it is proper to assume that deposit rates are yet to peak,” said Hatim Broachwala, a banking analyst with Khandwala Securities.

Policy impact
Increase in policy rates is also likely to put an upward pressure on deposit rates. Late January, the Reserve Bank of India raised its key policy rates (repo and reverse repo rates) by 25 basis points each to tame inflation. This was the seventh increase since January 2010.

Analysts say further rate increases are likely as inflation continues to remain high. “Given the structural underpinnings of inflation, we expect inflation to remain high and sticky through 2011, and expect an incraese of another 100-125 basis points in rates through the rest of 2011,” Chinoy said.

Bankers said an increase in policy rates might also lead to higher deposit rates.

“Deposit growth has picked up but it is still not keeping pace with credit (expansion)…Possibility of more deposit rate hikes cannot be ruled out in case policy rates go up,” Union Bank of India Executive Director SC Kalia said.