Banks are expected to increase their fixed deposit rates further to attract more deposits due to the widening credit deposit growth gap. For the week ending August 26, credit grew at 15.5 per cent year-on-year, while deposits grew at 9.5 per cent.
Depositor rates have moved up slowly compared to the pace of lending rates, which is one of the reasons for the slow growth in deposits. The average interest rate on outstanding loans went up by 34 bps from May to August, compared to a 22 bps jump in rates on outstanding term deposits during the same period.
The probability of hitting a double-digit rate in the near future is low, but it is clear that FD interest rates are poised to hit 8 per cent and are close to 9 per cent. While rate transmission is slower in FD rates, reduced liquidity may spur an increase in FD rates. Adhil Shetty, CEO, BankBazaar.com, says that there is still more upward movement in FDs and laddering FDs.
The Reserve Bank of India has increased the repo rate, the rate at which banks borrow money from the central bank by 1.9 per cent, to touch 5.9 per cent since the recent 50 bps rate hike by the Reserve Bank of India, the fourth hike since May.
One of the reasons for the slow growth of deposits is low FD rates compared to the 7.36 yield offered by the 10 year government bond. Other fixed-income avenues such as short-term debt and liquid funds and equities are emerging as an alternative to the higher returns. Demat accounts have doubled in value recently 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. In a report, Macquarie Research said that a widening gap between deposit and credit growth is a primary concern as it could lead to supply-side constraints going ahead.