In what could be a precursor to a system-wide rise in lending rates, State Bank of India (SBI) on Wednesday raised the interest rate on retail fixed deposits (FDs) by between 10-50 basis points (bps). This is the first hike in retail term deposit rates by the country’s largest lender in almost three-and-a-half years. FDs of under Rs 1 crore maturing in one year will now earn 6.4% per annum, up from 6.25% earlier. The corresponding rates at large private banks HDFC Bank and ICICI Bank stand at 6.75% and 6.6%, respectively. SBI also raised rates on bulk deposits by between 25-75 bps. One-year deposits of over Rs 1 crore will now yield 6.75%, up from 6.25% earlier. This is the third instance of a hike in bulk deposit rates at SBI in as many months. The latest round of rate increases may be different, however, in that they will have a material impact on SBI’s cost of funds on the basis of which lending rates are determined. Over 90% of SBI’s term deposits are under Rs 1 crore. In January, when the lender last raised bulk deposit rates, its management had said it was merely aligning them with retail deposit rates, and there would be no significant impact on its cost of funds.
So far, only private banks have raised their marginal cost of funds-based lending rates (MCLRs), HDFC Bank and Axis Bank notable among them.
Interest rates in the banking system are expectedly rising, following months of hardening in bond yields. Corporates are also returning to banks for financing as a result of funds getting more expensive in the money markets. Indeed, RBI executive director Michael Patra noted in the minutes of the monetary policy committee (MPC) meeting held on February 6-7 that the regulator may have lagged the markets in hiking rates. “Fixed income markets are telling us that we have fallen behind the curve,” he said. As large lenders SBI and ICICI Bank have their asset-liability committee (ALCO) meetings in the next few days, their MCLRs may well go the way of HDFC Bank and Axis Bank.