Savers may soon enjoy higher returns on bank deposits as the cost of certificates of deposit (CDs), a key indicator for broader deposit rates, surged sharply in May. This rise is driven by tighter liquidity conditions and stronger demand for funds, according to an ET report.
CD Rates Jump Significantly
One-year CD rates are currently quoting at 7.70 per cent, up from around 7 per cent at the end of April, marking a rise of 60-70 basis points within a month. One basis point equals one-hundredth of a percentage point. This increase reflects growing pressure on banks to attract funds through large institutional deposits, typically involving ticket sizes of Rs 500 crore or more.
Potential Impact on Retail Deposit Rates
Bankers and analysts believe that the rise in CD rates could eventually translate into higher retail deposit rates, even if the Reserve Bank of India (RBI) does not immediately increase policy rates. Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, noted, "Higher CD rates definitely indicate that money is becoming more expensive. It is correct to say that deposit rates will go higher, but when and how much will depend on how the RBI moves from here."
Tripathi added, "The longer end of the CD curve is pricing in a repo hike sooner or later this year. Deposit rates are likely to move upwards." Market participants suggest that tighter liquidity conditions are driving this trend.
Widening Gap Between Treasury Bills and CD Rates
Tripathi pointed out that the gap between the one-year government treasury bill and the one-year CD rate has widened significantly. The 364-day treasury bill is currently quoting around 5.75 per cent, while the differential with CD rates has reached nearly 200 basis points, compared to a normal range of 130-140 basis points. "This indicates tighter liquidity for the banking system," he said.
Analysts Confirm Tightening Liquidity
Soumyajit Niyogi, director of the core analytical group at India Ratings & Research, stated that the movement in CD rates clearly reflects tightening liquidity conditions. "It is fair to assume that retail deposit rates will also move up. System liquidity has shrunk further from about 2.5% of banking deposits in March to about 0.5% of deposits now," Niyogi said.
He added, "Going forward, as banks are expected to disburse large credit as part of the government package to MSMEs, there will be more pressure on liquidity. We should expect deposit rates to go up from here."
Decline in Average Daily Liquidity
Average daily banking system liquidity has declined sharply to around Rs 50,000 crore from nearly Rs 3 lakh crore in April. Bankers note that the liquidity environment has become more challenging as fund flows into CDs from mutual funds have also moderated.
A senior public sector bank official commented, "Even the mutual fund money, which made its way to CDs, has shrunk; so, all in all, we are in a tighter situation." The official added, "Of course, it all depends on how and when RBI moves with the benchmark repo rate, which will force banks' hands to raise deposit rates."
In summary, the surge in CD rates points to a tightening liquidity environment, which is likely to lead to higher retail deposit rates in the coming months, regardless of RBI's immediate policy actions.
