Banks Likely To Raise Interest Rates On Fixed Deposits. Five Things To Know

As the one-year deposit rates were slashed by 240 bps in the past three years, the deposit rate cut cycle has hence reached an inflexion point. This leads to an increasing likelihood of deposit rate hikes in the immediate term

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Banks Likely To Raise Interest Rates On Fixed Deposits. Five Things To Know

Government recently announced capital allocation of Rs 88,139 crore into PSBs

As banks' credit outpacing deposits in past few months, pushing the credit-deposit ratio up, lenders are likely raise deposit rates in the near-term, says a report by ratings agency ICRA. The agency, in a report on Tuesday, stated that the recent capital allocation of Rs 88,139 crore into state-run lenders by the government under the recapitalisation programme is expected to improve the ability of public sector banks (PSBs) to pursue credit growth in the coming months. As the government has announced PSB recapitalization plan during January 2018, the, banks are expected to exhibit some clarity on the magnitude of capital that they would receive by March 2018. This would improve their ability to pursue credit growth and raise the credit deposit ratio, the report added.

Banks Likely To Raise Deposit (FD) Rates. 5 Things To Know

 

1. The incremental credit in fiscal 2018 (till January 5) stood at Rs 2.02 lakh crore, far ahead of the additional deposits of Rs 1.27 lakh crore.

2. The agency's projection is that the additional capital will be deployed for garnering bank deposits by offering higher interest rates. Although the capital might also be used towards incremental credit by reducing the excess SLR, but the banks are unlikely to do so because that would lead to an upward movement in bond yields, adding to the treasury losses.

"Therefore, we anticipate an imminent increase in competition for deposit mobilisation and an upward movement in deposit rates," the rating agency said in the report.

3. Between September 29 last year to January 5 this year, the credit rose by Rs 1.85 lakh crore. The figure was remarkably higher than the addition of deposits by Rs 0.30 lakh crore. The slow accumulation of deposits can partly be attributed to the continued increase in currency with public (CWP), which increased by Rs 1.36 lakh crore from September 29, 2017 to January 5, 2018, reaching almost 96 per cent of the pre-demonetisation levels, said the report.

4. "With the cumulative cut of 240 bps in one-year deposit rates during the last three years, the deposit rate cut cycle has reached an inflexion point, with an increasing likelihood of deposit rate hikes in the immediate term," the report said. It said while the bulk deposit rates have recently witnessed an upward trend, the retail deposit rates continued to witness some cuts, albeit at lower pace.

5. The rating agency expects the incremental bank credit offtake to zoom in the current quarter. In order to support the same, the banks will need to mobilise additional deposits as the credit deposit ratio has increased to 74.6 per cent as on January 5, 2018, from the lows of 68.5 per cent in December 2016 and 73 per cent each at end of FY17 and the second quarter of FY18, it said.

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