The need to meet robust credit demand and the possibility of a repo rate cut by the Monetary Policy Committee, post-general elections, seems to be prompting banks’ tactically effect a sizable increase in deposit rates only at the shorter-end (up to one year).

This move could be based on the expectation that by the time a repo rate cut materialises (likely in the second half of calendar year 2024), the high-cost short-term deposits that banks raise over the next couple of months would have either matured or nearing maturity. This will help them reap the benefit of the rate cut, with fresh deposits coming in at a lower cost.

ALM realignment

“As RBI keeps liquidity tight and credit growth stays stronger, banks will continue to fight for deposits. Easing inflation will allow scope to ease liquidity….Banks may realign ALM (asset liability management) by focus on short-term deposits ahead of (repo) rate cuts,” said capital markets and investment banking firm Jefferies.

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There is a clear sign that banks want to attract deposits at the shorter-end. For example, State Bank of India effected the highest increase of 50 basis points (bps) in two maturity buckets – 7 to 45 days (from 3 per cent to 3.50 per cent) and 180 to 210 days (5.25 per cent to 5.75 per cent) – for term deposits of below ₹2 crore.

It effected a 25-bps increase in three maturity buckets – 46 days to 179 days (from 4.50 per cent to 4.75 per cent), 211 days to less than 1 year (5.75 per cent to 6 per cent) and 3 years to less than 5 years (6.50 per cent to 6.75 per cent).

V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, said: “In anticipation of easing of rates, banks don’t want to lock in liabilities for longer period at higher rates.

Liquidity deficit

“But the real problem is liquidity deficit. There is competition from banks to garner the same resources, whereas the savers now have many options.”

He said net durable liquidity was still in surplus of ₹2.15-lakh crore as on December 15, indicating hefty government balances.

However, frictional (transient) liquidity is fluctuating from small deficit to peak deficit of around ₹2.68-lakh crore seen on December 28.

While FDs of 1-3 years are a sweet spot for banks, Gopal Tripathi, Head of Treasury and Capital Markets, Jana Small Finance Bank, said one of the reasons for banks to effect bigger increase in short-term (up to 1 year) deposit rates and smaller increase in other tenors could be that they expect interest rates to fall.

The second reason is that the surplus investments that banks made during the Covid pandemic period will be maturing in a year’s time, thereby allowing them to utilise the resultant liquidity for extending credit.

That banks’ credit growth is outstripping their deposit’s is underscored by the fact that as of December 15, credit growth stood at 19.82 per cent year-on-year, while deposit growth was at 13.80 per cent.