Deposit rates may remain steady as liquidity improves, inflation falls

Many bank customers have been waiting for a further rise in deposit rates before booking their fixed deposits. “We feel that liquidity will be surplus in the system on account of deposits that will come into banks after the withdrawal of Rs 2000 notes from circulation. Also, there are indications that the RBI may not hike interest rates further. If liquidity is surplus and the repo rate hikes are not there, I don’t think banks will have any reason to increase deposit rates hereon,” said a senior banker with a state-run bank.

The net surplus liquidity in the banking system, as indicated by the amount of money absorbed by the RBI from the system, has jumped to Rs 1.76 lakh crore on May 31 from Rs 47,484 crore on May 22.

“The recent inflation print (April CPI at 4.7 per cent) indicates that the rate has peaked. I think the base case has to be that we are on a long pause,” said HSBC India CEO Hitendra Dave.

Bank deposits have shown a growth of 10.4 per cent as on May 5, 2023 as against 9.7 per cent in the previous year and credit offtake improved to 15.5 per cent (11.8 per cent), according to RBI data.

State Bank of India’s (SBI) two-year deposit rate has gone up by 190 basis points since February 2022 to 7 per cent now.

However, banking experts believe that some banks may raise deposit rates but it will be to meet their credit growth target, which they have kept higher than the system level.

“We believe that banks which have ambitious growth plans will be relatively more agnostic to the other macro variables and would raise deposit rates to just be able to manage those funds (to meet loan growth target). The incentive to raise deposit rates among banks which are not that aggressive and are looking to have balanced deposit and loan growth will be very low,” said Saswata Guha, Senior Director, Financial Institutions (Banks), Fitch Ratings.

On an average, deposit rates will be stable for some more time and then decrease, he said.

“The direction and extent will be a function of RBI’s policy rate direction and the relative level of liquidity in the system vis-a-vis the loan growth expectation of banks,” Guha said.

The RBI has set a September 30, 2023 deadline to deposit or exchange the existing Rs 2000 notes. As on March 31, 2023, the total value of Rs 2000 banknotes in circulation stood at Rs 3.62 lakh crore constituting only 10.8 per cent of notes in circulation.

Banking analysts see close to 30 per cent of the Rs 3.62 lakh crore coming back into the system in the form of deposits, over four months.

SBI Chairman Dinesh Khara on May 29 said an estimated Rs 17000 crore worth of Rs 2000 currency notes have either been deposited into accounts or exchanged by the lender after the note was withdrawn from circulation.

“About Rs 14000 crore has been deposited in accounts and Rs 3000 crore has been exchanged. Generally, we are about 20 percent of the market,” Khara said.

It is estimated that the banking system deposit base will increase by up to Rs 2 lakh crore on account of deposit of Rs 2000 banknotes.

Surge in deposit base will mean that the currency-in-circulation (CIC) will reduce and there will be an increase in liquidity in the system. The net liquidity is expected to improve further to Rs 2 lakh crore on an average.

The currency in circulation represents the balance of banknotes and coins in circulation, held by the general public and financial institutions. Currency with the public is arrived at after deducting cash with banks from the total currency in circulation, as reported by RBI.

“Even if one-third of Rs 3.62 lakh crore stays in the banking system, it will bring liquidity into the system for a few months. Besides, the dividend transfer by the RBI to the government will also boost the liquidity situation,” India Ratings and Research’s Director (core analytical group) Soumyajit Niyogi said.

The Central Board of the Reserve Bank of India on May 19 approved the transfer of Rs 87,416 crore as surplus, or dividend, to the Central Government for the accounting year 2022-23.

This surplus will come back into the system in the form of government spending, which will increase the cash situation in the banking system. Government spending is expected to pick up in the second week of June, experts said.

The deposits which will come back into the banking system will improve banks’ current account and savings account (CASA) , a cheaper source of funds for banks. These low-cost funds can help in meeting loan growth targets, and so banks might not increase term deposit rates, or fixed deposit (FD) rates, bankers said.

Banks had witnessed a similar rise in deposits after the 2016 demonetisation.

A study done by two senior officials of RBI in August 2017 showed that ‘excess’ bank deposit growth (y-o-y) following demonetisation was in the range of 3-4.7 percentage points. In nominal terms, the excess deposits that accrued to the banking system due to demonetisation were in the range of Rs 2.8-4.3 lakh crore, according to the study.