RBI policy move: Banks expected to raise term deposit rates gradually

Mortgage lender HDFC hiked home loan rates by 20 bps. Women can take a loan up to Rs 3 mn at 8.70%

While the Reserve Bank of India (RBI) has hiked the repo rate by 25 basis points (bps) for a second time this year, banks are expected to raise term deposit rates only gradually as liquidity in the system is fairly adequate. Deposit rates might rise by about 10 bps this quarter, said bankers.

Mortgage lender Housing Development Finance Corporation (HDFC), meanwhile, hiked home loan rates by 20 basis points. Women can take a loan up to Rs 3 million at an interest rate of 8.70 per cent, while other borrowers can avail of loans at 8.75 per cent. For loans above Rs 3 million, the revised rate is 8.80 per cent for women borrowers and 8.85 per cent for others. The new rates are effective from August 1.  

Referring to the impact of RBI's decision on liability side, Rajkiran Rai G, managing director at Union Bank of India, said interest rates on deposits were firming up, though gradually. The bank will decide on a revision in two weeks. Credit demand growth is in double-digit and banks need resources to finance loans.  

The rise in deposits in the near future will be unlike the sharp rise seen in the second and third quarters of the past financial year. At the turn of the interest rate cycle, deposit rates went up by 25-50 bps in one go, public sector bank executives said.  

Total bank deposits grew by 8 per cent to Rs 114.4 trillion in July from Rs 105.8 trillion in June 2017, according to RBI data. If credit demand gathers further steam in the financial year’s second half, banks might have to respond with hikes in response to the competition for raising of resources. Also, lending rates are likely to go up. 

“Banks have been raising rates since January-February, even before the RBI hiked its rate, as a response to improving business conditions and growth in credit demand. This policy’s current rate hike was already factored into our evaluation of deposit rates and there would no such immediate reaction to it,” said Rajeev Ahuja, executive director, RBL Bank.

Deposit rates vs lending rates

A CARE Ratings report says banks react faster on lending rates, compared with deposit rates, in a rising interest rate scenario. It has also been observed that the degree of transmission of the lending rate is more than that of the deposit rates. 

However, RBI’s rate hike of 25 bps in June saw deposit rates increasing on an average by 13 bps, while the Marginal Cost of Lending Rate (MCLR) increased by 5 bps.

This quicker transmission in the deposit rate could be partly attributed to the reversal of the interest rate regime witnessed in recent months, said CARE. The strain on banks’ performance and margins would not only delay but also moderate the transmission of the recent rate hike into higher deposit rates. Decreased competition is also a key factor for the stickiness. 

Most public sector banks are under RBI’s prompt corrective action (PCA) framework, due to a rise in stressed loans beyond a point. Hence, they are unable to disburse new loans. Given low competition from PCA banks, other PSBs, which can grow their loan book, might not be willing to increase their deposit rates, says ratings agency ICRA. While private banks want to take further market share, they still hold only a small part of the country’s deposits, despite offering somewhat higher deposit rates than PSBs. 

“An increase in deposit rates by private banks might not necessarily result in a meaningful gain in their share in deposits. Hence, they are likely to undertake only modest and calibrated hikes in their deposit rates in the immediate term,” it adds. 

HDFC Bank raised rates for deposits above Rs 50 million to a range of 4.25-7 per cent, effective Thursday. Axis Bank had also raised its bulk deposit rates to a range of 5.75-7 per cent the previous year. On the first day of the three-day meeting of RBI’s Monetary Policy Committee, State Bank of India had raised its long-term deposit rates, albeit marginally. The repo rate hike is not the only factor influencing deposit rates. A lot will depend on the flow of deposits and demand for credit. Higher growth in credit would make banks increase their deposit rates, said CARE. “RBL Bank has been nudging deposit rates up for the past three to six months, due to rising market yields and greater demand for loans,” said Ahuja. Banks are likely to reap the benefit of quicker transmission of lending rates than deposit rates in an increasing interest scenario.