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Deposit rates offered by banks are expected to have peaked, given the unlikely chance of future rate hikes, at least for the next 2-3 months, as the withdrawal of ₹2,000 notes is likely to trigger inflows into bank deposits.
“Deposit rates have sort of peaked because these inflows will put some downward pressure. There’s a good chance that not all the money may come to banks directly, but may come indirectly through other routes,” said Madhavi Arora, Lead Economist at Emkay Global Financial.
Combined with the fact that the strong inflation print for April had led to expectations of the central bank pausing on rates in the upcoming monetary policy in June, deposit accretion is no longer seen as a challenge for banks, analysts said.
‘Respite for banks’
“There could be some respite for banks in the sense that they need not go aggressive on rate hikes,” said Karthik Srinivasan, Senior Vice President Financial Sector Ratings at ICRA. Assuming deposit growth of 9-10 per cent in FY24, ₹1-2-lakh crore of the incremental accretion of around ₹17-18-lakh crore could then come from this.
“It’s a sizeable number. So, at least for the next few months, we may not see deposit rates going up,” he said, adding that it will also depend on which banks and how much they benefit from this exercise.
Amid higher CD ratios and tight system liquidity, banks had been offering higher deposit rates to especially attract term and bulk deposits. With CD ratios now expected to ease, banks won’t need to aggressively chase deposits also given expectations that credit off-take will slowdown going into the second half of the financial year.
The weighted average domestic term deposit rate (WADTDR) on outstanding bank deposits has increased by 12-16 bps every month since November 2022 to 6.16 per cent as of March 2023.
Analysts expect PSU and large private banks to be the biggest beneficiaries of the deposit mobilisation from the withdrawal of ₹2,000 notes.
Cost of capital
“Banks’ cost of capital will come down and also boost NIMs. They won’t reduce their deposit rates right now, but they also won’t increase them further,” Arora said, adding that because demand for deposits will increase, cost of deposits will come down on average even if banks don’t move deposit rates in either direction.
As of March 31, ₹2,000 notes in circulation are estimated at ₹3.3-3.6-lakh crore, accounting for around 11 per cent of total currency, much lower than ₹6.7-lakh crore at the peak in March 2018, when they comprised 37 per cent of the notes in circulation.
Experience from demonetisation showed 30-40 per cent of the value of notes withdrawn went into bank deposits. Using this as a guide-post, around ₹1.4-lakh crore could flow into bank deposits, which represents 0.8 per cent of total bank deposits, Gaura Sen Gupta, Chief Economist at IDFC First Bank said in a note.
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