Banks’ deposit rates seen peaked as note withdrawal may fuel mobilisation
Deposit rates offered by banks are expected to have peaked, given the unlikely chance of higher interest rates in the future, at least within the next 2-3 months, when withdrawal of Rs 2,000 notes is likely to drive inflows into bank deposits.
Deposit rates have kind of peaked because these flows are going to put some downward pressure. “There is a good chance that not all the money will come to the banks directly, but it may come indirectly through other avenues,” said Madhavi Arora, chief economist at Emkay Global Financial.
Coupled with the fact that strong inflation in April has led to expectations that the central bank will halt interest rates in the next monetary policy in June, the accumulation of deposits is no longer seen as a challenge for banks, analysts said.
Banks rest period
“There may be some relief for banks in the sense that they do not need to be aggressive in raising interest rates,” said Karthik Srinivasan, Senior Vice President, Financial Sector Ratings at ICRA. Assuming deposit growth of 9-10 per cent in FY24, from this ₹1-2-lakh crores could come from further accumulation of about ₹17-18-lakh crores.
“It’s a big number. So, at least for the next few months, we may not see a hike in interest rates on deposits,” he said, adding that it would also depend on banks and how much they benefit from this practice.
Amid high cash deposit rates and tight liquidity in the system, banks have been offering higher rates on deposits to attract time deposits and particularly large deposits. With cash deposit ratios now expected to decline, banks will not need to aggressively chase deposits either given expectations that credit withdrawals will slow in the second half of the fiscal year.
The weighted average domestic deposit time rate (WADTDR) on outstanding bank deposits has increased by 12-16 basis points per month since November 2022 to 6.16 percent as of March 2023.
Analysts expect PSU and large private banks to be the biggest beneficiaries of deposit mobilization from the withdrawal of the ₹2000 note.
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Also read: Withdrawal of INR 2,000 notes: Banks plan to intensify vigil over Jan Dhan Yojana accounts
cost of capital
“The banks’ cost of capital will go down and it will also boost NIMs. They won’t cut deposit rates right now, but they won’t raise them further,” Arora said, adding that as demand for deposits increases, the cost of deposits will fall on average even if banks don’t move deposits. rates either way.
As of March 31, the 2,000 notes in circulation were valued at ₹3.3-3.6-lakh crores, which is about 11 percent of the total currency, well below the ₹6.7-lakh crores at the peak in March 2018, when it consisted of 37 percent of the banknotes in circulation.
Experience with de-circulation showed that 30-40 percent of the value of banknotes withdrawn went to bank deposits. Using this as an indicative post, about Rs 1.4 crore could flow into bank deposits, which is 0.8 per cent of total bank deposits, Gora Sen Gupta, chief economist at IDFC First Bank said in a note.