Lenders likely to hike deposit rates up to 25 bps this festival season

Only those with asset-liability management mismatch would consider upward rate revisions

The Reserve Bank of India’s (RBI’s) decision to withdraw the incremental cash reserve ratio (I-CRR) is expected to benefit banks during the festival season. They are likely to increase deposit rates by up to 25 basis points (bps) in select maturity buckets. The rise in demand for funds to cover tax payments and meet quarter-end business targets could influence rate decisions by banks, according to bankers and money market executives.

Not all banks are expected to resort to rate hikes; only those with asset-liability management mismatch in specific buckets would consider upward rate revisions.

Delhi-based Punjab National Bank has raised interest rates by 25 bps to 6.75 per cent for the 270 days to less than one-year bucket. The revised rates came into effect on September 1, 2023.

On September 8, the RBI decided to withdraw I-CRR in phases, which will release about Rs 1 trillion into the system by October 7, 2023. The first phase of withdrawal, which began on September 9, 2023, released Rs 25,000 crore.

Treasury heads believe that in the short term, the decision will impact deposit rates as banks may not need to immediately raise deposit rates. However, in the medium term, factors such as liquidity conditions, asset-liability mismatches, and credit deployment opportunities will be considered. They also mentioned that the inflation rate will be a key factor in any decision regarding deposit rates.

Naveen Singh, head of trading and executive vice-president at ICICI Securities Primary Dealership, said, “If the RBI wants to tighten liquidity further, given that inflation is not coming off, it could result in higher deposit rates. Given that bank lending activity continues at a higher pace, banks might need to attract more deposits to match that lending activity. So, this could lead to higher deposit rates,” Singh added.

There is expected to be pressure on liquidity due to the outflow of resources for purposes such as tax payments. This could result in a modest rise in deposit rates of up to 25 bps in some buckets as banks prepare for immediate requirements as well as the upcoming festival season, said Soumyajit Niyogi, director, India Ratings & Research.

Krishnan Sitaraman, chief ratings officer at CRISIL Ratings, said the RBI’s decision to withdraw I-CRR in phases aims to strike a fine balance on the liquidity front.

By and large, the increase in interest rates on deposits, which began in the second half of the last financial year (2022-23), has already occurred. There may be some tactical increases in deposit rates in specific maturity buckets for asset-liability management.