With inflation expected to ease going forward, banks may lower deposit rates, broking firm Angel has said in a report.
“With inflation levels expected to ease going ahead, financial savings are expected to strengthen leading to higher deposit accretion, allowing banks to reduce their deposit rates,” the brokerage firm said in its report.
Inflation levels have come off considerably over the past six months and are expected to cool further as demand remains weak and policy effects further kick in, the report added.
“With inflation and consequently interest rates having a downward trajectory going ahead, we expect lower defaults, which coupled with higher recoveries (from higher delinquencies during the last two years) should lead to asset-quality improvement for the banking sector,” Angel said in its report that covers 27 lenders.
Further, with proposed Basel—III norms making capital requirements stricter, banks are expected to continue focusing on margins rather than balance sheet growth, it said.
This will keep the industry’s margins at healthy levels, it said.
The banks should benefit from lower competitive intensity due to ongoing capital shortage as well as declining cost of funds as liquidity improves, leading to positive effect on net interest margins (NIMs), Angel said.
“Hence, notwithstanding any short-term re-pricing-related NIM impact, overall we have a positive outlook on the sector’s margins,” said the report.