The intensifying competition among banks to expand their deposit base may force banks to increase fixed deposit rates going ahead, the Reserve Bank of India said in its monthly bulletin released today. Banks have been increasing deposit rates after a series of rate hikes by the RBI and a strong credit growth as the economy recovers from the pandemic.
Since May last year, the Reserve Bank has increased the short-term lending rate by 225 basis points to contain inflation.
As returns on fixed deposits improved and differentials with savings deposit rate increased in the recent period, the lion’s share of bank deposits accrued to term deposits. On an annual (y-o-y) basis, term deposits recorded a growth of 13.2 per cent, whereas current and savings deposits increased at a moderate pace of 4.6 per cent and 7.3 per cent, respectively, the RBI bulletin for March 2023 said.
The RBI noted that despite some moderation in credit growth in recent months, the overall growth remains strong.
As banks keep repricing their deposit rates, they have also revised their repo linked external benchmark-based lending rates (EBLRs) upwards by 250 bps in tandem with the increases in the policy repo rate since May 2022.
Banks have also increased their 1-year median marginal cost of funds-based lending rate (MCLR) by 135 bps during the period May 2022 to February 2023, the RBI bulletin said.
On the overall economy, the RBI said that India has emerged from the pandemic years stronger than initially thought, with a steady gathering of momentum since the second quarter of the current financial year, despite a global slowdown.
On the supply side, the report said, agriculture is into a seasonal uptick, industry is emerging out of contraction and services have maintained momentum.
But consumer price inflation remains high and core inflation continues to defy the distinct softening of input costs, the report noted.
Consumer inflation in India will likely range between 5% and 5.6% in the next financial year that starts in April, the RBI said. However, adverse weather conditions impacting seasonal rains pose a risk. Harvesting of winter crop is also getting impacted by heat waves, untimely rains and hailstorms, risking an increase in food inflation.
(With Agency Inputs)
