On Thursday, Credit rating agency ICRA said that the Indian banks will be forced to sharply hike their deposit rates in the coming months due to the rise in interest rates and credit demand, PTI reported.
Indicating the rising deposit rate regime, certificates of deposits (CDs), which banks use heavily to borrow funds, have been steadily rising and are already at a multi-year high, according to an analysis by ICRA Ratings.
Banks' reliance on CDs has been increasing in recent months to fund incremental credit demand, with the CD outstanding volume rising 243% on-year as of July 1, 2022, to ₹2.4 lakh crore, the report said.
Furthermore, rising bond yields and, as a result, CD yields have widened the gap between CD yields and average card rates on bank deposits. The spread on bank CDs rose to 170 basis points (bps) over their average six-month deposit rates in July, compared to just 30 bps in April 2022.
At 1.5% of total deposits as of July 1, 2022, CDs are yet to touch the peak level of June 2011 when they were at 8.3% of total deposits, ICRA said.
Similarly, the spread for CDs over average deposit rates of banks has been on a sharp upswing as the hike in deposit rates has been more calibrated. As a result, the report notes that banks with a high share of wholesale/interest-rate-sensitive deposits will see a sharper rise in funding costs.
The report said that banks have been more calibrated in hiking their card rates on deposits. The interest rate hike on deposits will be aggressive in the coming months as credit growth picks up further, leading to a decline in banking system liquidity, the report said without mentioning by how many levels the rates may go up.
"We also expect a hike in the repo rate by 60 bps by September to 5.5%, which will further push yields on various benchmark instruments like T-Bills up and hence the bank CD rates, thereby widening the spreads even more compared to bank deposit rates." This will force banks to start chasing deposits aggressively by offering higher rates in the next three quarters, "opines Anil Gupta, a vice president with the agency."
The 90-bps hike in the policy rates since May has resulted in the yields on various money market instruments as well as bonds increasing sharply, while the floor rate rose 130 bps during this period.
As a result, the daily average yields on short-term instruments such as the 91-day T-bill, 182-day T-bill, and 364-day T-bill spiked to 5.2%, 5.7%, and 6.0%, respectively, in July 2022 from 3.8%, 4.3%, and 4.6%, respectively, in March 2022, it added.
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