Banks increase interest rates on bulk deposits as liquidity tightens

With surplus liquidity in the system shrinking and deposit growth trailing credit growth by a large margin, banks have hiked interest rates on bulk deposits, suggesting that they are looking for such deposits to meet the credit demand.

Rates on three-month corporate deposits are in the range of 6.30-6.50 per cent, up 30-35 bps from a week ago, market participants said. With liquidity tightening in the system, banks have turned to certificate of deposits (CDs), resulting in outstanding CDs at ₹2.44 trillion as of September 9, 2022, compared with ₹0.7 trillion a year ago, registering a growth of over 250 per cent YoY.

According to the latest Reserve Bank of India (RBI) data, 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, resulting in a widening of the credit-deposit growth gap and exacerbating concerns that slow deposit growth could emerge as one of the biggest constraints for loan growth in the system.

“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 now close to a 10-year high,” said Suresh Ganapathy, Associate Director, Macquarie Capital.

Many banks have announced special deposit schemes over the past month, offering over 6 per cent interest on fixed deposits, to garner durable liquidity. The banking system liquidity surplus was more than ₹8 trillion in early April 2022. Liquidity in the system has come down. Last week, liquidity in the banking system slipped into a deficit mode for the first time in over three years, signalling a structural shift away from loose financial conditions in the economy.