As liquidity tightens, banks raise interest rates on bulk deposits


With the system’s surplus liquidity diminishing and deposit growth behind credit growth by a wide margin, banks have raised interest rates on bulk deposits, implying that they are seeking such deposits to fulfill credit demand.

Rates on three-month corporate deposits are in the 6.30-6.50 per cent range, up 30-35 basis points from a week earlier, according to market participants. With the system’s liquidity tightening, banks have moved to certificate of deposits (CDs), resulting in outstanding CDs of Rs 2.44 trillion as of September 9, 2022, up from Rs 0.7 trillion a year before, representing a YoY increase of more than 250 percent.

According to the most recent Reserve Bank of India (RBI) data, the economy’s credit growth is at a 9-year high of 16.2 per cent, while deposits are growing at 9.5 per cent, resulting in a widening of the credit-deposit growth gap and exacerbating concerns that slow deposit growth could emerge as one of the system’s most significant constraints to loan growth.

“With loan growth at Rs 16.2 per cent and deposit growth at 9.5 per cent, the gap at 650-700 basis points (bps) is now close to a 10-year high,” said Suresh Ganapathy, Associate Director, Macquarie Capital.

Many banks have established special deposit programmes in the last month, providing more than 6 per cent interest on fixed deposits in order to attract long-term liquidity. In early April 2022, the banking system’s liquidity excess was more than Rs 8 trillion. The system’s liquidity has decreased. For the first time in over three years, liquidity in the banking system fell into deficit last week, signaling a fundamental shift away from permissive financial conditions in the economy.

“Liquidity will continue to remain under pressure. As of now, the core liquidity (which includes the government’s cash balance) is still positive, but by December, that core liquidity will also turn neutral. Interbank liquidity will continue to remain tight,” said a senior trader handling asset-liability management at a private bank.

“The banking system used to have Rs 6-7 trillion of liquidity and now it’s dying down. There is a demand-supply mismatch but credit cannot wait. So, most banks, including our bank, have realigned their deposit pricing. We came out with a special scheme on deposits for 444 days and mopped a sizable amount from it. The obvious impact will be on deposit rates and eventually it could lead to a higher interest outgo and some sort of pressure on NIMs. But that pressure could be offset by the concomitant repricing of assets,” said A K Das, MD & CEO, Bank of India.

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