With interest rates on the boil, customers are rushing to earn higher returns on fixed deposits. As a result, the term deposits of banks have surged 17.4% in the first quarter of the current financial year, making it the highest quarterly growth in the past five years. The highest growth rate before this in the past five years was in the first quarter of 2020-21 when it stood at 9%.
Terms deposits rose Rs 16 trillion to reach Rs 108 trillion as of June 30, 2023 from Rs 92 trillion on June 30 previous year, according to the Reserve Bank of India (RBI) and Care Ratings data.
Customers rushed to park their money in fixed deposits after banks raised interest rates amid rising inflation and to mobilise funds to meet strong credit demand. “With increase in the repo rate, the options for depositors have increased. In the bond and money market, rates have gone up. Rates which were around 3.5% and 4.5%, have now gone up to 6.5% and 7%. Even the one-year paper is also at 7 percent. With rates going up in the system, banks are forced to offer higher yields to depositors,” said Sanjay Agarwal, Senior Director, Care Ratings.
Total deposits, which include savings, current account and term deposits, grew by 12.6% to reach Rs 185.3 trillion as of June 30 this year. Savings deposits stood at Rs 59.7 trillion while current account deposits were at Rs 17.58 trillion at the end of June this year.
Bankers say that money is flowing from low-yielding savings and current account deposits to high-yielding fixed deposits, which is visible in the decline of Current Account-Saving Account (CASA) ratio. CASA ratio of banks declined by 244 basis points (bps) year-on-year and stood at 41.6% as of June 30, 2023, as compared to 44.1% over a year ago.
“Depositors have shifted funds to term deposits from savings deposits to take benefit of rise in the interest rates. This trend is on expected lines because we have seen this trend in previous rate cycles,” head of consumer banking of a private bank told FE.
With rates reaching new highs, bank customers are now wondering whether the party is over for depositors and whether the rates on deposits will inch up further. Experts say that banks may adopt a selective approach and do not expect across the board increase in rates.
“Overall deposit rates seem to have peaked out but still there is scope for some increase in deposit rates in some buckets and not across all the buckets. In some pockets, we may see modest hikes in deposit rates by some banks in the third quarter,” Soumyajit Niyogi, Director – Core Analytical Group, India Ratings & Research told FE.
“The competition among banks for raising deposits has intensified after a long time. We have seen strong credit growth nearly after a decade and that has intensified funding competition among banks. Banks are facing stiff competition from mid-sized private sector banks, small finance banks, deposit-taking NBFCs and other retail bonds, that has exerted upward pressure on deposit rates,” Niyogi added.