What a difference one year can make! This time last year, interest rates were at a record low as central banks, including the Reserve Bank, focused on reviving economies battered by the Covid-19 pandemic. But, through 2022, the RBI, like other central banks, has had to recalibrate its monetary policy and raise interest rates multiple times to tame high inflation. While this had led to an increase in lending rates, banks, in the last few months, have taken multiple rounds of deposit rate hikes, given the strong credit growth.
Looking ahead into 2023, the RBI is expected to hike its benchmark rates further in the next monetary policy committee meeting in February and then keep interest rates on hold for much of next year, as it will look to gauge the impact of the rate hikes already implemented on growth and inflation. With credit growth expected to remain in double-digits, banks will look to offer attractive interest rates to boost their deposits.
Deposit rates had been on a downward slope over the last decade. In 2011-12, average one-year term deposit rates were at a little over nine per cent. They declined to around 6.50 per cent in 2017-18 and further to around 5.0 per cent last year.
Now, however, interest rates are on the increase. Banks are seeing strong credit growth (17.5 per cent year-on-year growth in the fortnight that ended December 2, 2022). While deposits too have grown, they haven’t kept pace with the strong credit growth. Deposits stood at Rs 175.2 lakh crore for the fortnight that ended December 2, 2022—a 9.9 per cent year-on-year growth.
In comparison, in the fortnight that ended December 03, 2021, credit growth was at 7.3 per cent and deposit growth at 9.3 per cent. In December 2020, credit growth was at 4.7 per cent and deposit growth was at 11.3 per cent, according to CARE Ratings.
Owing to slower deposit growth, coupled with the central bank tightening liquidity in the system, there has been a competition of sorts among lenders to attract low cost deposits in the last six-seven months. State-run as well as private sector banks have upped their deposit rates multiple times in that period.
State Bank of India, the country’s largest lender, is now offering an interest rate of 6.75 per cent on deposits for a period between one year to less than three years on deposits below Rs 2 crore. Senior citizens get an additional 50 basis points of interest, which takes the interest rates to 7.25 per cent.
Private sector rivals HDFC Bank and ICICI Bank are offering an interest rate of 7.0 per cent for tenors above 15 months. Senior citizens get an additional 50 bps interest. Smaller rival IDFC First bank is also offering interest rates of up to 7.50 per cent on term deposits.
“While the term deposit rates have reasonably increased in the past six to eight months for the entire banking system, the increase in deposit rates by mid-sized private banks in few tenure buckets have shown a sharp rise compared to other banks,” according to a study by India Ratings and Research.
Since May 2022, the RBI has raised the benchmark repo rate (the rate at which it lends to commercial banks) to 6.25 per cent from 4.0 per cent. The expectation is that the central bank will raise rates again in February, before a pause.
Economists at DMI Finance, for instance, see another 25-35 bps repo rate hike in February.
“This would take the repo rate up to 6.5-6.6 per cent, which, given the central bank’s inflation expectation of 5.9 per cent for Q4 2022-23, would attain real positive interest rates. We believe that the RBI will hold rates steady at that level and pivot further towards a neutral monetary policy stance,” the economists said.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, sees RBI MPC finely split between a last 25 bps hike and a pause in February and then adopt a prolonged wait-and-watch approach.
Deposit rates have already inched up around two per cent in the last six-eight months. But, with credit growth likely to remain strong, the expectation is banks will further raise interest rates on deposits in the coming year.
“In the current year, the change in credit has outpaced deposits, reversing the earlier trend of deposits growing at a higher rate when compared to credit. The deposit rates have already started to increase and CareEdge expects that the rates would increase even further as competition for deposits intensifies as banks focus on sourcing deposits due to rising policy rate, strong credit demand, and comparatively lower liquidity in the market,” said analysts at CARE Ratings.
Rakshit echoes similar sentiments.
“While the rate hike cycle may be nearing the peak, the deposit and loan rates are yet to witness further upside, especially as liquidity surplus remains more skewed towards neutral-deficit. We expect the deposit rates will need to go further higher to meet the rising credit demand in the near term,” he said.
Looks like 2023 is set to be a good year for savers.