Deposit rates could rise 105 bps due to 190 bps hike in repo rate: SBI report

With a current and savings account (CASA) deposit share of 45% in the banking system, a 190 basis point (bp) increase in the repo rate could at best result in a 105 bp increase in rates deposit. Indeed, only 55% of term deposits would require rate adjustments, resulting in a less than complete adjustment of deposit rates to the repo rate, a report by the State Bank of India’s economic research department said on Monday ( SBI). .

“Any increase in the deposit rate beyond this will be a further increase,” the report said.

In the current round of monetary policy tightening, the six-member Monetary Policy Committee (MPC) raised the repo rate by 190 basis points. As a result, banks quickly revised their lending rates, which led to an increase in the marginal cost of the funds-based lending rate (MCLR) by 50 to 70 basis points and external lending linked to benchmarks. of 190 basis points. However, deposit rates have not kept pace with lending rates.

“The median SCB term deposit rate, which reflects prevailing card rates on new deposits, increased by 26 basis points between May and September 2022. The magnitude of the pass-through to retail deposit rates however, was higher for longer-term deposits. deadlines. Beyond September, there was a sharp increase in deposit rates,” the SBI report said.

In recent weeks, as liquidity in the banking system has tightened, banks have raised their deposit rates to gather sustainable cash to fund the strong demand for credit in the economy.

SBI raised its deposit rates by up to 80 basis points on certain maturities, effective October 22. IDBI Bank has also launched a special fixed deposit program offering 6.4% for 555 days. Other banks such as ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Punjab National Bank and a few others have also raised their deposit rates over the past few weeks as competition for funds to finance credit growth escalates. was intensifying.

According to the report, RBI is pushing banks to raise their deposit rates to collect more deposits or collateral funds to finance credit growth and this could be one of the reasons for keeping liquidity in deficit mode for an extended period.

The system’s liquidity moderated in September due to the increase in outflows of withholding taxes and credit drawdowns. According to the report, the liquidity deficit in the banking system has remained at Rs 60,000 crore over the past four days.

According to the latest data from the RBI, bank credit in the economy is growing by 17.9%, a multi-year high, while deposits are growing by only 9.6%, heightening fears that the slow deposit growth becomes an impediment to loan growth in the future.