Banking Central | Have fixed deposit rates already peaked?

RBI

Bank of India (BoI) has become the latest lender to increase the rates on fixed deposits, or FDs as we know them. The bank last week increased the rate on one-year deposits to 7 percent from May 26 for retail customers on deposits lower than Rs 2 crore. For senior citizens, the rate is 7.5 percent and 7.65 percent for the "super seniors".

Most big banks are offering around 7 percent interest on one year to 15-month tenure deposits. Deposit rates have been rising in tandem with the Reserve Bank of India’s cues. Since May 2022, the RBI has cumulatively raised its key repo rate by 250 basis points. The repo, the rate at which the RBI lends to commercial banks, has moved from 4 percent to a four-year high of 6.5 percent.

Banks have responded by raising FD rates from 5-5.5 percent to around 7 percent for one-year deposits. While overall deposit rates have moved up, smaller private banks and small finance banks have beaten their bigger rivals by offering higher rates — even above 8 percent to their customers.

The race for deposits is largely attributed to the sense of urgency among banks to raise cheaper funds to meet loan demand.

Is the party over?

But how long the rates will continue to rise? For all practical reasons, the cycle may have come to an end with the RBI pausing the hike in its April policy review.

At least two senior bankers told this writer over the weekend that bank FD rates have peaked in this rate cycle. They gave two major reasons:

One, the RBI has signalled a pause in the rate hike cycle. After the 250 bps hike, the central bank has indicated that it expects inflation to ease in the approaching months.

Inflation, as measured by shop-end prices, dropped sharply for a second month in a row, slipping to an 18-month low of 4.70 percent in April from 5.66 percent in the previous month.

Core inflation, which excludes the volatile food and fuel items, too, declined sharply from 5.8 percent in March to 5.2 percent in April. The RBI has an inflation target of 5.3 percent for the current financial year.

Secondly, while the credit growth picked up in the last fiscal, averaging around 15.4 percent, bankers do not expect a big pick going by the feedback from the ground, as a slowing economy may prompt companies to hold investment plans.

FD rates

Multiple forecasts suggest India will feel the pinch of a global slowdown, which can hurt growth across segments.

The RBI expects India’s GDP to grow by 6.5 percent in this fiscal but a lot will depend on how the global economy fares. Banks may even end the year with lower-than-expected credit growth.

In view of the concerns, banks may not feel the need to hike deposit rates further to attract inflows. If there aren’t enough avenues to deploy money, banks will face a carry cost of funds that are sitting idle.

Both RBI cues and the trends in credit growth suggest that banks may not hike fixed deposit rates further in the current rate cycle and may even start cutting them after a quarter or so.