Retail deposit rates may rise

Banks might hold on to lending rates for the time being

With Consumer Price Index (CPI)-based inflation at 9.84 per cent in September (provisional data), the Reserve Bank of India (RBI)’s second quarter monetary policy review would provide cheer to investors in debt, primarily for three reasons: First, the RBI statement could goad banks to step up efforts to mobilise deposits. Second, it indicated inflation-indexation bonds linked to consumer inflation would be launched in November-December. And third, lending rates are unlikely to rise in a hurry.

“Going forward, however, the more durable strategy for mitigating mismatches between the supply of, and demand for, funds is for banks to step up efforts to mobilise deposits,” RBI’s policy statement said on Tuesday.

To attract deposits, banks would have to increase rates. While bankers are tight-lipped on the quantum of the rise, there is a consensus deposit rates might be increased soon. “The governor has asked banks to rely on deposits for funds. For that, we will have to work on getting more deposits into the system,” said K R Kamath, chairman and managing director of Punjab National Bank and chairman of Indian Banks’ Association.

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This would only be possible if banks give more real returns on deposits. “If you look at it, today, deposits give negative returns compared to inflation. But the deposit rates would be a function of each bank’s liquidity position,” Kamath added. More clarity on rates would emerge once banks’ asset-liability committees meet in a day or two.

A few banks have already scaled up rates. Last month, State Bank of India raised its retail term deposit rates (below Rs 1 crore) across tenures. For seven-179 day tenures, the rate was raised from 6.5 to 7.5 per cent a year, for 180-to 210 days from 6.5 to 6.8 per cent and for a year-10 years from 8.75 per cent to nine per cent. Similarly, Oriental Bank of Commerce raised its rates by 50 basis points to nine per cent for deposit tenures of two-three years; for tenures of more than three years, the rate was raised to 9.25 per cent. Lakshmi Vilas Bank increased rates on deposits in four maturity slabs by up to 50 basis points.

Lending rates could see some upward pressure, though this is likely to have a delayed impact. “Some change in lending rates is expected, but the quantum and the timing remains to be seen,” said Arundhati Bhattacharya, chairman and managing director of State Bank of India.

The rise in lending rates would also be a function of the liquidity situation. “Given the rise in repo rate has been compensated by a cut in the marginal standing facility (MSF), the review has doubled the limits of funds to be raised under seven-14-day repos; liquidity is tight in the third quarter of the financial year and the extent of impact on banks’ cost of funds remains to be seen,” said Chanda Kochhar, managing director and chief executive of ICICI Bank. Those planning to take the plunge by investing when the deposit rates rise should wait a while. Currently, fixed deposit rates are lower than CPI numbers. For instance, State Bank of India’s one-year rate of nine per cent is lower than the CPI, which is 9.84 per cent.

With the apex bank proposing to launch inflation-indexation bonds (linked to CPI) soon, it would be a good opportunity to earn higher returns. However, remember these bonds would have a 10-year tenure. Also, the returns would vary, depending on the CPI rate. On the other hand, a fixed deposit, as the name suggests, would earn fixed returns.