Deposit rates up but returns still negative
MUMBAI: Despite the recent flurry of interest rate hikes, the real return on bank deposits remains negative, signalling the impact of runaway prices on domestic savers.
Retail inflation stood at 7.04% in May, the fifth straight month it breached the 6% upper bound of the Reserve Bank of India’s (RBI’S) inflation target. Meanwhile, State Bank of India’s (SBI) one-two-year fixed deposits—typically used as a proxy for bank deposits—offer a return of 5.3%, pushing the inflation-adjusted return into negative territory.
The central bank expects CPI to stay above its target range for three quarters of the current fiscal year, which could further curtail real returns on deposits unless banks hike deposit rates substantially. To be sure, the monetary policy committee’s 6.7% inflation projection for FY23 does not take into account the repo rate hike of 50 basis points (bps) on June 8.
Lenders like SBI, Bank of Baroda (BOB), IDBI Bank, and HDFC Bank have recently raised deposit rates, albeit in a few maturity buckets. Experts said had it not been for the abundance of liquidity in the system, banks would have raised deposit rates much more. In fact, the deposit rate increases have been quite marginal and nowhere close to the 90bps hike in the repo rate over two months. “These rate hikes are also not across the board and just over a few maturity brackets as banks require funds in specific tenors to match assets being created,” said Madan Sabnavis, chief economist, BOB.
Typically, a 100bps hike in repo rate leads to a 50bps increase in deposit rates; for lending rates, it increased 75-80bps under the marginal cost of funds-based lending rate (MCLR) regime until 2020. In October 2020, the RBI mandated banks to link new floating rate retail loans to external benchmarks, and because most lenders chose to use the repo rate, the transmission of lending rate hikes is immediate.
“The rising interest rate scenario is beneficial to depositors to the extent that earlier they were getting nothing, but now they are getting something. However, unless the market dynamics change, there is a huge push for lending, and the system liquidity gets eroded significantly, deposit rate hikes will not be commensurate with lending rate hikes. Thus, depositors will still get negative returns,” Sabnavis said.
Surplus liquidity, as reflected in average daily absorption under the liquidity adjustment facility (LAF), stood at ₹5.5 lakh crore between May 4 and May 31, lower than ₹7.4 lakh crore from April 8 to May 3, RBI governor Shaktikanta Das said on June 8.