Interest rates on deposits need to go up, say experts, as share of FDs in household financial assets drops

• Banks will have to increase interest rates on deposits faster, say experts, as investors turn to other financial assets for higher returns.
• Despite recent hikes by leading banks like SBI, HDFC, ICICI and others, interest rates on deposits have lagged behind RBI’s 190 bps repo rate hike.
• According to analysts, deposit rates will need to at least beat inflation for them to be attractive to investors.

In the last month, top Indian banks have increased interest rates on term deposits – while SBI raised them once, ICICI Bank and HDFC Bank raised their rates twice. Experts say that despite these hikes, there is scope for further increase in deposit rates as banks try to bring in more deposits.

As of today, SBI and HDFC Bank are offering 6.25% interest on 3-year fixed deposits, while ICICI Bank offers 6.2%. For context, in December 2021, HDFC Bank and ICICI Bank were offering 5.15% interest, while SBI’s was 5.1%.

Apart from these top private and public sector banks, small finance banks (SFB) like AU SFB and Equitas SFB, among others, are offering 7.4-7.5% interest on 3-year fixed deposits. Another small finance bank, Unity SFB, has launched a new fixed deposit scheme called Shagun 1Y1D with a 366 days deposit tenure, offering 7.8% interest for general customers and 8.3% interest for senior citizens.

“Deposit rates need to at least beat inflation – while inflation is currently at 7.41%, the best deposit rates by top banks are still in the range of 6-6.5%,” Joydeep Sen, an independent debt market analyst told Business Insider India.

Term deposits need to be more attractive, Sen said. The share of bank deposits in the overall financial assets of a household has been going down since the pandemic.

A recent report by RBI shows a decline in the share of bank deposits in financial assets of households to 25.5% in FY22 from 34.4% in FY20. On the other hand, the share of mutual funds increased to 6.3% from 2.6%, and that of equity increased to 1.9% from 1.1% in the same period.

Interest rate hikes on deposits have not kept pace with loans

Currently, most fixed deposit tenors return negative real interest rates to investors, since the rate of inflation is higher than interest rates – retail inflation stood at 7.41% in September.

The central bank has hiked the repo rate by 190 bps so far this year. While banks have been quick in passing on these rate hikes on to loans, the increase in deposit rates has been slower. According to the Centre for Monitoring Indian Economy data, the credit deposit ratio stood at 74.5% in October 2022, up from 70.5% in June 2021.

Credit deposit ratio, also known as CD ratio, is a measure of how much money raised by banks as deposits has been used to give loans. A CD ratio of 70% means ₹70 out of every ₹100 deposit has been deployed as loans. A high CD ratio implies strong credit demand, while a low CD ratio implies weak credit demand. The CD ratio had fallen to historic lows of under 70% in late 2016 during demonetisation.

According to a Livemint report, the weighted average increase in interest rates on fresh rupee loans between April and August 2022 stood at 82 bps, while the increase in deposit rates stood at 26 bps.

According to RBI data, credit growth has risen to a multi-year high of 16.4% YoY in September, while deposits grew 9.6%.

“Credit costs for some banks in India are in low double-digits and banks are making contingent provisions in order to avoid showing abnormal growth in profits, and to top it all, there is sharp margin expansion,” said Macquarie Capital in a note.

Five out six big banks have either matched or exceeded analyst expectations in terms of earnings, prompting Uday Kotak, CEO of Kotak Mahindra Bank, to say they were in one of the most important “Cinderella times of the credit cycle”.

MFs are growing faster than deposits

As banks look to make fixed deposits attractive, they have another hurdle to cross – the growing interest in mutual funds.

According to a report by Bank of Baroda Research, growth of mutual funds’ assets under management (AUM) has outpaced that of deposits in five out of six financial years. The only year when MFs lagged deposits was in FY20, when Sensex fell 23.8%, with equity MFs declining 32.4%.

Even in FY23 till date, bank deposits have increased 2.5%, while MF AUMs have increased 4.6%.

“Bank deposits would face competition from mutual funds as households get more market savvy and are willing to take their chances in the capital market. Mutual funds provide a safer way by pooling resources and investing the same based on professional judgement,” said the report by Bank of Baroda Research.

Banks are aggressively mobilising to attract deposits, as shown by one video of a Canara Bank official advertising a special ‘666 days’ FD scheme going viral.

Best deposit rates offered by top banks

Here are the best deposit rates being offered by leading private and public sector banks on deposits less than ₹2 crore:


Source: Bank websites | As on October 31, 2022

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