MUMBAI: Depositors hoping to pocket some extra returns from Fixed Deposits (FD) of banks are set to get disappointed. With increased liquidity in the banking system, the tide has turned in favour of banks and they are unlikely to hike interest rates on FDs in the current year. The rates are either likely to stay at current levels or may head downward also, according to experts.
Future trajectory of FD rates
As widely expected, the Reserve Bank of India (RBI) hit the pause button again on a repo rate hike in its latest monetary policy review. The RBI has increased the monetary policy rate by 250 basis points during the current rate hike cycle. The weighted average bank deposit rates for one-year fixed deposits and the lending rate have increased by 70 to 80 basis points during the same period. Banks pass on this hike in repo rates to their customers gradually.
Prior to the announcement of the withdrawal of R2,000 banknotes, it was anticipated that banks would continue to transmit past rate increases by the RBI, even after the RBI ceased raising rates. In the recent past, bank credit grew significantly faster than deposits, resulting in a sharp decline in systemic liquidity surplus. This was the additional factor that indicated that banks would continue to raise rates.
“Recent demonetisation has resulted in an increase in deposits, which has decreased the cost of funds and created a significant surplus of systemic liquidity. As a result, banks are less compelled to raise deposit rates and pass on the costs to lending rates. In light of this, we anticipate that banks will maintain their fixed deposit and lending rates for the next couple of quarters,” Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers told TNIE.
“A modest reduction in these rates cannot be ruled out, particularly from banks with large excess liquidity. This flat or downward bias of bank interest rates would continue, however, as long as the additional deposits that have entered the banking system as a result of demonetisation remain in the banking system,” he added.
Increased liquidity
The increase in liquidity in the banking system means that there will be no additional pressure on the lenders to raise interest rates on FDs to mobilise funds. The situation has changed dramatically over the past few months in banking. A few months earlier the banks were competing to attract depositors by raising interest rates on FDs.
“Deposit of R2,000 notes has provided a significant boost to liquidity and has released the pressure on the banks to raise deposit rates further. Amidst a sudden surge in banking system liquidity, a broad-based reduction in the deposit rates looks unlikely. Some banks have liquidity surplus while some have a deficit, so the decision to alter deposit rates will vary from bank to bank, so no bank will take a chance to lose market share,” Soumyajit Niyogi, Director - Core Analytical Group, India Ratings & Research told TNIE.
“However, we may see some cut in deposit rates in certain durations of FDs. There may be some softening in rates of FD of shorter duration. Some banks may cut interest rates on FDs with a duration of less than 1 year,” Niyogi added.
This increase in liquidity has been driven by the increase in government spending, decline in the currency in circulation and redemption of government bonds. The decision to withdraw R2,000 currency notes from circulation further boosted short-term liquidity in the banking system.
According to the RBI, about 50% of the total R2,000 notes, valuing R1.8 lakh crore, have returned to the banks and about 85% of them are coming back as deposits into the bank accounts. As of March 31, R2,000 notes worth R3.62 lakh crore were in circulation.
The average daily outstanding net liquidity in the banking system was already in surplus. Liquidity surplus in the system has again increased with the Net LAF absorption at R2.2 lakh crore as on 7 June from an average of R1 lakh crore in April-May this year.
“Even the deposit of R2,000 notes in banks has added to the liquidity. Bank deposits are likely to increase by at least Rs2 lakh crore assuming some of the notes would already be with banks in currency chests. Overall deposit growth in FY24 should grow over 11% y-o-y. This will effectively imply that spate of deposit rate hikes could be a thing of the past,” noted a recent SBI report.
Should you invest in FDs?
As interest rates are likely either to remain at current levels or fall, experts say that retail investors can choose this time to invest in FDs to maximise their returns. However, the decision to invest in FDs by individuals should be taken only after assessing their financial goals and liquidity requirements. “It appears that interest rates will likely remain at their current levels throughout the current financial year.
For investors seeking to maximise their earnings, this presents an opportunity to consider investing in FDs. By capitalising on the current higher interest rates, individuals can secure a steady and attractive return on their investment,” Anita Gandhi, Whole Time Director, Head of Institutional Business, Arihant Capital Markets said.
“FDs provide a reliable and low-risk avenue for growing savings, and with interest rates expected to remain stable in the near term, they offer a viable option for those seeking stable returns,” she said. By locking in funds for a suitable duration, investors can benefit from the higher interest rates and enjoy the peace of mind that comes with a predictable income stream, she added.