SBI hikes retail deposit rates across maturities by up to 0.5%

Here's more proof that the surplus liquidity in the banking system courtesy demonetisation, which brought a huge spike in bank deposits, is drying up fast: The country's largest lender, the State Bank of India (SBI), has just hiked interest rates on its retail deposits - those below Rs 1 crore - by 10-50 basis points. So you can expect a hike of up to 0.5 per cent across maturity baskets. The revised rates, applicable from today, are as follows:

"The proposed rates of interest shall be made applicable to fresh deposits and renewals of maturing deposits," SBI said in its notification. The bank has previously hiked rates on deposits from Rs 1 crore to Rs 10 crore by 100 basis points or one percentage point, and other banks followed suit.

If you are wondering why the bank has done a U-Turn on its retail deposit rates - just last November it had slashed rates by 25 basis points - you need to understand the inverse relation between credit offtake and fixed deposit rates. When there is little demand for credit, banks reduce deposit rates because they don't need funds. In the September quarter (Q2), bank credit had grown at just 6.5 percent, the fourth straight quarter of low growth.

But in Q3, bank credit resumed double-digit growth at 10.7 percent, a 15-month high. "The recovery was led by private sector banks and supported by public sector banks," said the RBI in its quarterly statistics on deposits and credit. As pointed out by a recent report by rating agency Icra, banks' credit is now outpacing deposits, pushing up the credit-deposit ratio. For the record, incremental credit in the current financial year (till 5 January) stood at Rs 2.02 lakh crore compared to additional deposits of Rs 1.27 lakh crore. So banks now need money for lending, hence they are making fixed deposits more attractive, which means that you can expect more banks to follow SBI's lead shortly.

The bad news is that a hike in deposit rates is typically followed by an uptick in lending rates. Banks like HDFC Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank and Yes Bank have already hiked their MCLR by 5 to 10 basis point in recent times, so borrowers are likely looking at more expensive home and car loans in the months ahead.

with PTI inputs