The market participants said that they are looking for deposits that meet the Rates on three-month corporate deposits, up 30 bps from a week ago, because of the shrinking of the system and deposit growth trailing credit growth. With tighter integration in the system, CDs with outstanding CDs at Rs 2.44 trillion have a growth of over 250 per cent YoY, compared to Rs 0.7 trillion a year ago.
Credit growth in the economy is at a 9 year high of 16.2 per cent and deposits are growing at 9.5 per cent, causing a widening of the credit-deposit growth gap and concerns that slow deposit growth could be one of the biggest constraints on loan growth in the system, according to the latest RBI data.
With loan growth at 16.2 per cent and deposit growth at 9.5 per cent, the gap at 650-700 basis points bps is close to a 10 year high, said Suresh Ganapathy, Associate Director, Macquarie Capital.
Over the past month, many have announced special deposit schemes, which offer more than 6 per cent interest on fixed deposits to garner durable banking system liquidity surplus was more than 8 trillion in early April 2022. Liquidity has come down in the system. The banking system went into deficit mode for the first time in over three years last week, signalling a shift away from loose financial conditions in the economy.
Liquidity will continue to be under pressure. As of now, the core liquidity that includes the government's cash balance is positive, but by December that core liquidity will also turn neutral. A senior trader with asset-liability management at a private bank said that interbank liquidity will continue to be tight.
CD rates will be in tandem with repo rate hikes from now on. The person quoted above said that money markets are now considering a 50 bps hike at both this policy and the next.
The banking system used to have 6 -- 7 trillion of liquidity, but now it is dying down. Credit can't wait because there is a demand-supply mismatch. 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. There will be a huge impact on deposit rates and eventually it could lead to higher interest outgo and some pressure on NIMs. A K Das, MD CEO, Bank of India said that the pressure could be offset by the concomitant repricing of assets.
Since May, the benchmark policy repo rate has been raised by 140 basis points, according to MPC's six-member monetary policy committee. The widening gap between credit growth and deposit growth may lead to supply-side issues, resulting in a rise in lending rates of banks, especially the repo rate.
With elevated credit growth, the pressure on liquidity will continue and the pressure on liability short tenure deposits and term deposits will increase, according to S K Khatanhar Suresh, deputy managing director, IDBI Bank. Deposit rates could increase by 25 bps, according to the current assessment.