Deposit Rate War Is Brewing, Says Macquarie
The State Bank of India recently raised deposit rates by 5-100 basis points.
Indian banks are increasing deposit rates as they compete to accumulate deposits, following the repo rate hike.
The State Bank of India recently raised deposit rates by 5-100 basis points. HDFC Bank Ltd. usually keeps a 25-basis-point premium over SBI with one to three-year deposit rates at 7%, according to a note by Macquarie Research dated Dec. 14.
"HDFC Bank usually keeps a slight premium to SBI and hence the current deposit rates are in line with what SBI is offering," it said.
According to the note, "a deposit rate war is brewing, as expected" and other banks like ICICI Bank Ltd. and Axis Bank Ltd. will follow suit.
SBI has hiked one to three-year deposit rates by 50-65 basis points, the note said.
HDFC Bank's deposit rates have gone up 210 basis points to 7% in the past two years in the "critical 1-3 year bucket where bulk of inflows happen and now it is at a three-year high".
On Dec. 7, the Reserve Bank of India hiked the benchmark repo rate by 35 basis points, to the highest since February 2019, as it continues efforts to quell inflation in the economy amid resilient economic activity. In all, the central bank has hiked repo rate by 225 basis points "from the bottom".
The cues from RBI's rate decisions affect banks' lending and deposit rates. A hike in repo rates would translate to higher cost of borrowing funds from the central bank. This cost is passed on to customers as well through higher lending rates. On the other hand, banks also pass on the benefit of higher rates to depositors.
"So, deposit rates are now catching up with RBI rate hikes," the note said.
According to Macquarie, with deposit growth running well below loan growth and deposit rates inching up rapidly, margins will peak out by the third quarter of fiscal 2023 and will start heading down in the following quarter.