For Indian Depositors, There's Good News And Bad News
For Indian depositors, there is good news and bad news.
The good news—after hitting the lowest in decades, bank deposit rates are finally starting to rise. The bad news—inflation is rising quicker so returns for depositors remain negative.
After India's Monetary Policy Committee raised policy rates, a few banks and non-bank lenders have started to push up deposit rates.
State Bank of India raised rates for domestic term deposits above Rs 2 crore by between 40 and 50 basis points for deposits up to two years. The hike was sharper at 90 basis points for longer tenors.
Axis Bank raised rates to 5.25-5.30% for deposits of 1-2 years of less than Rs 2 crore from 5.1-5.25%.
Kotak Mahindra Bank raised rates by 30-35 basis points for deposits of less than Rs 2 crore to 5.5% for deposits of 390 days and to 5.6% for a 23 month deposits.
Bajaj Finance hiked rates by 10 basis points to 7% for fixed deposits ranging between 36-60 months.
HDFC Ltd. hiked rates on its fixed deposits by 15-20 basis points.
There will be a tendency by banks to compensate deposit holders and the expectation is that there should be positive real rates or at least neutral real rates for FD holders as the Reserve Bank of India sucks out excess liquidity and competition to attract depositors grows, Ashutosh Khajuria, executive director and chief financial officer at Federal Bank Ltd., said.
My guesstimate is that interest rates for depositors are expected to rise by 50 basis points, if not more. But, this will not happen overnight.Ashutosh Khajuria, Executive Director and CFO, Federal Bank
The extent of deposit rate hikes will depend on an individual bank's portfolio mix, he added.
PR Rajagopal, executive director at Bank of India, said deposit rates will rise but an increase of more than 50 basis points is unlikely. Deposit rates are likely to hover around 5.5-6%, he said.
Higher Rates, But Even Higher Inflation
The increase in deposit rates reverse a decline that began in 2019 as the Reserve Bank of India started cutting rates to support the economy and eased liquidity conditions.
However, the rise in rates comes alongside an increase in inflation. This means that depositors earn little or nothing in inflation-adjusted terms by putting their money with banks.
At present, the weighted average deposit rate is at 5.03%, according to data from the Reserve Bank of India. This compares to the central bank's average inflation forecast of 5.7% for FY23, an estimate likely to be revised higher in June. Inflation in April hit an eight-year high of 7.8%.
It will be hard to beat inflation even if interest rates go up, Prableen Bajpai, founder of FinFix Research, said. Depositors' returns depend on their tax bracket, but even those in the lower tax brackets will just about break even, she said.
Can depositors opt for non-bank lenders offering higher rates?
The higher rate of return is accompanied with higher risk, and besides, a customer is unlikely to switch for better FD returns, Bajpai saod.
Harsh Roongta, principal officer at Fee Only Investment Advisers, said for those looking at positive returns, FDs are not the recommended option. "The period where we saw positive inflation adjusted rates was an aberration. If you want positive returns, fixed income is not the way to go."
Government-run small savings schemes, with administered rates, continue to be an aberration, Roongta said.
The government left interest rates on small savings schemes unchanged for the first quarter of FY23. While the Public Provident Fund carries an annual interest rate of 7.1%, the National Savings Certificate carries an annual interest rate of 6.8% for the ongoing quarter.
Deposit Growth Falls Below Credit Growth
Apart from higher inflation and policy rates, an increase in credit demand while deposit inflows plateau could prompt lenders to push up deposit rates.
Non-food bank credit growth rose to 10.2% year-on-year as on April 8, 2022. However, aggregate deposits grew 10.1% for the same duration. Credit growth has caught up with deposit growth in 2022 after a gap of nearly two years.
This could prompt banks to chase deposits to catch up with the continuing pick-up in credit growth, said Roongta.