Term deposit rates have surged to their highest levels in the past five years as banks rush to meet strong credit demand, according to the Reserve Bank of India’s latest monthly bulletin.

Term deposit rates of more than one-year tenor are currently (as on October 6, 2023) in the 6-7.25 per cent range against 5.45-6.10 per cent range as on October 7, 2022, per RBI data.

“There is anecdotal evidence that funds are flowing from low-yielding current account savings account (CASA) to higher-interest bearing term deposits,”

“Competition among banks for garnering deposits has intensified after a long hiatus,” said RBI officials in an article ”State of the Economy” in the Bulletin.

Higher Rates Repricing

During May 2022 to August 2023, the weighted average domestic term deposit rate (WADTDR) on fresh and outstanding deposits increased by 233 bps (basis points) and 157 bps, respectively, per the report. One basis point is equal to one-hundredth of a percentage point.

While the WADTDR on fresh deposits has declined in recent months, rates on outstanding term deposits continue reflecting the repricing at higher rates, the officials said.

High CD rollout

The officials underscored that the structural liquidity mismatch in the banking system is reflected in the highest issuances of certificates of deposits (CDs) in September during the current financial year.

Fund mobilisation through issuances of CDs has picked up to ₹ 3.31 lakh crore during 2023-24 (up to October 6) from ₹ 3.08 lakh crore in the corresponding period of the previous year as banks tried to bridge the funding gap caused by faster credit vis-à-vis deposit growth.

“Outflows on account of tax payments and increased demand for credit ahead of the festival season have also tightened access to liquidity. Renewed government spending and the release of the last tranche of the incremental cash reserve ratio (I-CRR) will likely ease liquidity but CD raising will likely continue into October,” the officials said.