Game of Interest Rates
Lending rates are rising but deposit rates are not increasing at the same pace, despite the RBI’s rate hikes. Surprisingly, credit growth is unaffected
FOLLOWING THE RESERVE Bank of India’s (RBI) rapid hikes of the repo rate—the rate at which banks borrow from the central bank—the banks have lost no time in passing on the burden to borrowers by increasing their lending rates. But when it comes to deposit rates (for fixed deposits), the change in interest rates is much slower. For example, from May to August 2022, the average interest rate on outstanding loans rose by 34 basis points (bps) compared to a slower 22-bps jump in rates on outstanding term deposits during the same period. For the record, the RBI has raised the repo rate by 190 bps since May.
However, this trend is expected to reverse soon as the widening credit-deposit growth gap has emerged as an issue of some concern, especially since the rate hikes do not seem to have impacted the credit off-take. Take, for instance, the week ended August 26. This week saw credit grow at 15.5 per cent year-onyear while deposits grew at 9.5 per cent. “We have seen a steady and broad-based pick-up in system credit growth despite rising interest rates, which we view positively. However, a widening gap between deposit and credit growth remains our primary concern as it could lead to supply-side constraints going ahead,” said Macquarie Research in a report. Overall, the credit-deposit ratio stood at 73.31 per cent as of August 2022, compared to 70.23 per cent a year ago.
Experts say banks will be forced to increase their deposit rates before long.
“While the probability of hitting a double-digit rate in the near future is low, it is clear that fixed deposit (FD) interest rates are slated to hit 8 per cent and are inching towards the 9 per cent mark. While the rate transmission is slower in FD rates, reduced liquidity may spur the increase in FD rates,” says Adhil Shetty, CEO of BankBazaar.com, a marketplace for financial products. Currently, FD interest rates are in the range of 5.45 per cent to 6.1 per cent.
Given that there is still more upward movement expected in FDs, it is advisable not to lock money for the long term. Instead, staggering FD investments would be a good move for the next few months so that one can cash in on higher FD rates, as they happen. Due to lower FD rates, other fixed-income avenues such as short-term debt and liquid funds along with equities have also emerged as attractive alternative investment classes giving higher returns. For example, demat accounts have more than doubled to 100 million for the first time, according to data from National Securities Depository Limited and Central Depository Services (India) Limited.
The government has also recently revised the interest rates on small savings schemes. While the rate for the popular public provident fund and National Savings Certificates remained unchanged, rates for five other schemes—Kisan Vikas Patra, Senior Citizen Savings Scheme, Monthly Income Scheme, and two-year- and three-year time deposits—have been raised by up to 30 bps. The interest rate on small savings schemes was last revised during the first quarter of 2020-21.