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Banks increase interest rates on bulk deposits as liquidity tightens

September 30, 2022

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.

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