Banks unlikely to hike rates due to high deposit accretion, liquidity

Experts also said that another pause in the repo rate hike cycle is expected from the monetary policy committee on June 8.

Banks are in no rush to hike deposit rates any further due to high deposit accretion following the withdrawal of Rs 2,000 notes, and sufficient liquidity in the banking system, experts said.

“Our deposit rates are by and large established. The moderation in rates is likely to start in the second quarter," said N. Kamakodi, Managing Director and Chief Executive Officer, City Union Bank.

Shekhar Bhandari, President, Global Transaction Banking, Kotak Mahindra Bank, said that the hike in rates has been the highest in recent years. “Due to the withdrawal of Rs 2,000 notes, we have seen high accretion in deposits. A rate hike is unlikely,” said Bhandari.

Industry experts echoed the bankers, and said that the liquidity in the banking industry has been strong, hence there will not be any hike in deposit rates.

Also read: RBI likely to maintain pause on interest rate as inflation moves southwards: Experts

“Liquidity in the banking system has been built up lately due to infusion by the Reserve Bank of India (RBI). Largely, the deposit rates of banks will remain stable. We may see some individual banks hiking rates if they have a deposit crunch,” said Sanjay Agarwal, Senior Director and Head, CareEdge.

Pause in rate hikes

In the last monetary policy committee (MPC) meeting on April 6, RBI chose to pause rate hikes and retained the repo rate at the same level taking into account the turmoil caused by the global banking crisis and the contagion risks.

Since May 2022, the RBI has hiked the repo rate by a total of 250 basis point (bps) as part of its war on inflation. Repo rate is the rate at which the central bank lends to banks.

Bankers Moneycontrol spoke to said that they are expecting the MPC to announce another pause in the repo rate hike cycle on June 8.

“A pause is expected. RBI is likely to go for a wait-and-watch approach. One can expect interest rates to come down by the second quarter of the fiscal year 2023-24,” said Ittira Davis, MD and CEO, Ujjivan Small Finance Bank.

Strong liquidity and deposits

The liquidity in the banking system improved after the withdrawal of Rs 2,000 notes from circulation, and was further aided by the government’s month-end spending towards salaries and pensions.

Per RBI data, as of June 5, there was surplus liquidity to the tune of Rs 2.38 lakh crore in the banking system, up from Rs 80,614 crore on May 25.

Last week, RBI Governor Shaktikanta Das said the central bank will ensure adequate liquidity in the banking system.

On the deposits front, Moneycontrol earlier reported that approximately Rs 14,000 crore and 3,104 crore worth of Rs. 2,000 notes had been deposited in state-owned lenders State Bank of India and Bank of India, respectively.