Banks are likely to raise interest rates on Fixed Deposits (FD) because of impending competition from a new savings scheme announced in Budget 2023 that offers an annual rate of 7.5 percent, experts said.
The Mahila Samman Savings Certificate will provide a competitive interest rate of 7.5 percent on deposits maturing after two years. Experts said banks will have to keep a check on how this plays out for them and work on their FD rates.
“Banks are playing smart by providing high interest rates for selective tenures, which has partially worked out for them. But they are likely to work on hiking interest rates for FDs,” said Chandan Sinha, former executive director of the Reserve Bank of India.
Other than the new scheme, experts said banks may see some competition for deposits in the coming months from the existing Senior Citizen Savings Scheme and Monthly Income Account Scheme that saw an enhancement in deposit limits from Budget 2023.
“The banking system could see more competition on deposits given the increase in investment limits across various small saving instruments amidst an environment of high credit growth,” said Karthik Srinivasan, Senior Vice President, Group Head, Financial Sector Ratings, ICRA.
Optimism on new small savings scheme
Finance Minister Nirmala Sitharaman in the budget announced the new small savings scheme.
“A one-time new small savings scheme, Mahila Samman Savings Certificate, will be made available for a two-year period up to March 2025 offering a deposit facility up to Rs 2 lakh in the name of women or girls at a fixed interest rate of 7.5 percent with partial withdrawal option,” she said in her speech.
A report by the HDFC Bank’s Treasury Economics Research suggested that the reliance on small savings for the fiscal years 2023 and 2024 may be an optimistic assumption.
“However, given the increase in bank deposit rates (and room for some further upside), the assumptions on collections under small savings seem optimistic,” the HDFC Bank report said.
Banks raising FD rates
In the past few months, banks have increased interest rates on FDs to attract more customer deposits and stay ahead of competitors. Among major banks, State Bank of India (SBI), HDFC Bank and Kotak Mahindra Bank have raised their FD interest rates. Small finance banks (SFBs) like AU, Jana and Equitas hiked interest rates, too.
SBI increased the interest rates on FDs by 0.50 percent across various tenors. HDFC Bank and Kotak Mahindra Bank hiked the interest rates on FDs by 0.75 percent and 0.25 percent, respectively.
Also read: Race for deposits: Banks lure customers with new schemes, higher interest
Among the SFBs, AU increased its interest rate on FDs by 0.25 percent; Jana and Equitas increased FD rates by 0.30 percent and 0.50 percent, respectively.
Risks with deposit and credit growth of banks
In the last few months, credit growth has overtaken deposit growth, meaning there is more demand for money but less supply in the market. Data with the Reserve Bank of India (RBI) showed that credit growth surpassed deposit growth in 2022.
Bank credit growth peaked at 17.2 percent compared to aggregate deposit growth, which stood at 9.8 percent till in September 2022, RBI data showed.
Other than this, industry experts highlighted that in recent months, liquidity conditions have been narrowing in banks’ balance sheets.
Also read: High bank deposit rates lure mutual fund investors to FDs
Radhika Rao, Economist at DBS Bank, said: “In recent months, the balance has narrowed led by active foreign exchange (FX) intervention, slower pick up in deposit growth vs loans, a tightening cycle limiting the room for open market operations and temporary drivers such as festive demand and lags in government spending.”
Sinha also highlighted that the higher interest rates on bank FDs are not for longer tenure deposits. In other words, banks are cautiously raising rates to meet the credit demand but only for short-tenure FDs.
All good for now…focus on MPC meet
While some experts cautioned banks about potential competition, others highlighted that the high-interest rates will continue to lure people to invest in FDs.
“There existed a tension between bank FDs and small schemes of the government. With the introduction of the new scheme, it would further rise. But for now, bank FDs are offering higher interest rates than the government scheme, it is expected that people would invest in banks,” said Sinha.
The Economic Survey of 2022-23 highlighted that monetary conditions in the market are improving considering the rising deposit interest rates.
“Monetary policy transmission is well underway as lending and deposit rates increased following the hike in policy rates,” the survey said.
But experts suggested that the banks hiking FD rates and their future course would depend on the outcome of RBI’s Monetary Policy Committee (MPC) meeting on February 8.
“The focus now shifts to the MPC decision on February 8 where we may see a 25 basis point hike in the repo rate which would take it to 6.50 percent,” said Parul Mittal Sinha, Head of Financial Markets, India and Macro Trading, South Asia, at Standard Chartered Bank.
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