Indian lenders expecting stronger inflows of retail deposits as interest rates peak

As interest rates offered to individuals to deposit money in banks have increased in recent months to bring them on par with those offered by the government’s micro-savings scheme, Indian lenders are expecting a stronger inflow of retail deposits.

According to central bank data, the weighted average interest rate on domestic time deposits rose 55 bps to 5.62 per cent in November from 5.07 per cent in May when the Reserve Bank of India began its rate hike cycle.

On the other hand, government-backed micro-savings plans currently offer between 4-7.60%. This is the same as when the RBI started raising rates, but the 1st, 2nd and 3rd year time deposit rates in the January-March quarters each rose 110bp from the previous three months.

Banks started raising lending rates right after the RBI’s first rate hike in May, but deposit rates only began to rise around June.

Currently, most large lenders offer deposit rates ranging from 6.75% to 7.30% for 1-2 year deposits and 5.75% to 7.25% for long-term deposits.

Smaller banks such as AU Small Finance Bank Ltd and DCB Bank Ltd offer higher rates of around 7.5% to 7.75%.

Bank FD Rate (%) 1-2 years 3-5 years

State Bank of India 6.75 6.25

Bank of Baroda 7.05 6.25

HDFC Bank 7 7

ICICI Bank 7 7

Axis Bank 7.26 7

Data from respective banks

January 20 website. compilation


“Bank lending is currently growing at a faster rate than deposits, but this growth rate differential is expected to narrow due to higher interest rates in the coming months,” said Yes Bank MD Prashant Kumar.

According to the latest RBI data, lending from Indian banks increased by nearly 15 per cent year-on-year in the two weeks ending December 30, while deposits rose only 9.2 per cent.

A narrowing of the interest rate differential between bank deposits and government micro-savings schemes will lead to more retail money flowing into term deposits, bankers said.

“Investments can shift from micro-savings plans to bank deposits,” said Suresh Katanha, deputy director of IDBI Bank. He expects deposit rates to rise by another 25 basis points across the system.

Federal Bank managing director Shalini Warrier agreed.

“As interest rate differentials narrow, more money will flow to bank deposits compared to micro-savings plans,” Warrier said. “We’re already seeing that happen and it’s likely going forward.”

Micro Savings Plan Percentage Percentage

Post Office Deposit 4.00

1 year time deposit 6.60

2-year time deposit 6.80

3-year time deposit 6.90

5-year time deposit 7.00

5-year Recurring Deposit 5.80

Monthly Income Account System 7.10

Sukanya Samriddhi Account System 7.60

Public funds system 7.10

National Savings Certificate 7.00

Kisan Vikas Patra 7.20