Term deposits of banks may earn higher returns for the first time since late 2008 with surplus liquidity drying up on one hand and investments picking up, thereby creating more demand for bank funds.
According to a report by Moody’s Analytics, the research arm of rating firm Moody’s, deposits rates will go up as surging investment and monetary tightening have soaked up excess liquidity in the banking system. This development signals a change in the way banks respond to policy rates.
It further goes on to say excess liquidity had been a major factor holding down commercial bank rates. From late 2008, liquidity in the banking system rose sharply as monetary easing and weak private borrowing left banks awash with funds.
In response, commercial banks deposited surplus funds at the RBI. Since the beginning of this year, however, the volume of surplus funds deposited at RBI has trended down, and since May 31, banks have moved from net lenders to net borrowers of funds from the RBI.
The report says the move will be welcomed by savers, who have seen rising prices and falling deposit rates erode the value of their savings over the past year. The report has also indicated that the rise in bank rates will help slow economic activity and reduce inflationary pressures.
However, as far as banks are concerned, RBI data notes that while the annual YoY growth in loans has been picking up for over two months now, the year-on-year growth in deposits has been secularly falling since early January. While YoY loan growth has gone up from 13.9% in early January to 14.9% by May 21, the YoY deposit growth in the same period has dipped from 16.8% to 14.3%.
Even on an incremental basis, it has grown by only 0.7% so far compared with a growth of 3.4% in the year-ago period. Data also indicates that banks are already seeing a flight of funds to small savings schemes. As results, banks may have to hike deposit rate to woo back depositors.
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