Banks may soon raise interest rates on fixed deposits; Here’s why

Banks are expected to increase their fixed deposit rates further to attract more deposits as the widening credit–deposit growth gap is emerging as a concerning issue. Consider this, for the week ended August 26, credit grew at 15.5 per cent year-on-year while deposits grew at 9.5 per cent.

One of the reasons for the slow growth in deposits has been the fact that deposit rates have moved up slowly compared to the pace of lending rates. For example, from May to August the average interest rate on outstanding loans rose by 34 bps compared to a slower 22 bps jump in rates on outstanding term deposits during the same period.   

“While the probability of hitting a double-digit rate in the near future is low, it is clear that 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. Nevertheless, there is still more upward movement expected in FDs and laddering FDs would continue to be a good move for the next few months,” says, Adhil Shetty, CEO, BankBazaar.com, a marketplace for financial products.   

The recent 50 bps rate hike by the Reserve Bank of India, the fourth hike since May, has increased the repo rate- the rate at which banks borrow from the central bank- by 1.9 per cent to touch 5.9 per cent.

One of the reasons for the slow growth in deposits is low FD rates compared to the 7.36 yield offered by the 10-year-government bond, currently. Similarly, other fixed-income avenues such as short-term debt and liquid funds along with equities are emerging as an alternative class given the higher returns. Recently, Demat accounts have also more than doubled to 10 crore for the first time, according to data from National Securities Depository Limited (NDSL) and Central Depository Services (CDSL).   

“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.