Rate cycle turns as commercial banks hike fixed deposit rates

Commercial banks in India have revised their deposit rates upward by 5-15 bps in an indication that the interest rate cycle has turned amid uptick in loan demand

Commercial banks in India, including State Bank of India and HDFC Bank, have revised their deposit rates upward by 5-15 bps in an indication that the interest rate cycle has turned amid uptick in loan demand.

Since the Reserve Bank of India’s monetary policy on February 10, four banks have revised their deposit rates — UCO Bank and Central Bank of India — apart from SBI and HDFC Bank. While banks have hiked deposit rates, any increase in lending rates is unlikely to happen anytime soon, which could depend on the monetary policy stance, bankers said.

SBI, the country’s largest lender, revised its fixed deposit rates by 10 - 15 basis points in different tenors, effective February 15.

According to the revised rates, term deposit of less than Rs 2 crore will fetch an interest rate of 5.2 per cent as against 5.1 per cent earlier in 2-3-year tenor. In 3-5-year tenor, the same amount will fetch 5.45 per cent interest rate as against 5.3 per cent earlier. Further, in the 5-10-year tenor, the rates have been revised upward by 10 bps for Rs 2 crore term deposit.

HDFC Bank — the largest private sector lender — has also revised its fixed deposit rates upward, with effect from February 14. It has hiked interest rate on fixed deposits of below Rs 2 crore of one year tenure by 10 basis points to 5 per cent from 4.9 per cent earlier. Also, interest rate in 3-5-year tenor has been revised upwards by 5 bps to 5.45 per cent. However, rates of other tenors have been kept unchanged.

These lenders increased interest rates despite RBI delivering a “super dovish” policy while maintaining the accommodative stance – after which bond yields softened.

In the monthly bulletin released by the RBI on Wednesday, the state of economy report observed that the scheduled commercial banks (SCB) in India are at inflection point so far as interest rates are concerned as there has been a complete pass through of 115 bps reduction of repo rate to weighted average lending rate on fresh rupee loans as well as outstanding loans since March 2020. The report noted increase in credit demand, along with lower accretion of deposits, compelled the banks to increase deposit rates.

“This is perhaps an indication of banks seeing higher credit demand in the coming months,” said Anil Gupta, vice-president & sector head, Icra, said on the increase in deposit rates.

“Generally, the banking sector sees higher demand for credit in the last quarter of the financial year. In any case, banks are parking excess liquidity at 3.99 per cent at the variable rate reverse repo of RBI and the weighted average rate of liquidity absorption has gone up to 3.87 per cent. So, a 15-20 bps increase in deposit rates would not impact the banks as such, with benchmark rates remaining unchanged,” he added.

The very low interest rates on bank deposits were hurting the depositors as a result of which there was a surge in demand for guaranteed products in the insurance space.

“While fixed deposit rates are slowly moving upwards, it is essential to realise that the rates are expected to increase slowly and in small measures,” said Adhil Shetty, CEO, BankBazaar.com.

“For a truly rewarding investment, the returns after tax must be at least a few percentage points above inflation. Fixed deposits have a long way to go before it meets these levels, and as such, should not be the primary investment or mode of wealth creation,” he said.

In a recent report, SBI research had noted that a delay in raising deposit rates may result in a large incremental increase at a later point of time. “The incremental credit deposit ratio stands at 140, indicating sooner than later there is a need to increase the deposit rate to garner more durable liquidity in terms of bank deposits. Any delay in raising deposit rates may result in only large incremental increases at a later point of time as banks will have to do a catch up,” the report said.