With the share of current and savings account (CASA) deposits at 45 per cent in the banking system, a 190 basis points (bps) increase in repo rate could at best translate into a 105-bps increase in deposit rates. This is because it is only the 55 per cent of the term deposits that would need rate adjustments, resulting in a less than full adjustment of deposit rates to repo rate, a report by State Bank of India’s (SBI) economic research department said on Monday.
“Any deposit rate increase beyond that will be an additional one,” the report said.
In the current cycle of monetary policy tightening, the six-member monetary policy committee (MPC) has raised the repo rate by 190 bps. Consequently, banks have revised their lending rates swiftly, resulting in the marginal cost of funds-based lending rate (MCLR) moving up by 50-70 bps and external benchmark-linked loans going up by the full 190 bps. However, the deposit rates have not kept pace with the lending rates.
“The median term deposit rate of SCBs, which reflects the prevailing card rates on fresh deposits, increased by 26 bps during May-September 2022. The extent of pass-through to term retail deposit rates, however, has been higher for longer-tenure maturities. Beyond September, there has been a large increase in deposit rates”, said the SBI report.
In the past few weeks, as the banking system liquidity has tightened, banks have ramped up their deposit rates to garner durable liquidity to fund the high credit demand in the economy.
SBI increased its deposit rates by upto 80 bps on select maturities, with effect from October 22. IDBI Bank also came out with a special fixed deposit scheme offering 6.4 per cent for 555 days. Other banks such as ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Punjab National Bank, and a few others have also increased their deposit rates in the last few weeks as competition for getting funds to fund credit growth intensified.
According to the report, RBI is pushing banks to increase their deposit rates to garner more deposits or secured funds to finance the credit growth and this could be one of the reasons to keep the liquidity in deficit mode for an extended period.
The system liquidity has moderated in September due to higher advance tax outflows and credit off take. Liquidity deficit in the banking system has been now consistently running at Rs 60,000 crore for the last four days, according to the report.
As per the latest RBI data, bank credit in the economy is growing at 17.9 per cent, a multi-year high while deposits are growing at just 9.6 per cent, exacerbating concerns that slow deposit growth may become a constraint in loan growth going forward.