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Folks and companies are borrowing like never before; will banks raise FD rates?

An economic principle

When demand outpaces supply, then prices rise. That’s an indisputable economic principle.

Of course, cetris paribus, or other things being equal.

Look at what happened to the prices of tomatoes and some other vegetables and spices recently.

Are banks, too, going to be in a similar situation?

Indian banks are walking a tightrope.

Recent data from the Reserve Bank of India (RBI) reveals a significant uptick in loans compared to deposit growth during April-August 2023.

Specifically, bank credits rose 9.1% to Rs 124.5 lakh crore, while deposits saw a 6.6% increase, reaching Rs 149.2 lakh crore.

April – August 2023 loan growth vs. deposit growth

• Loans: 9.1% increase, totalling Rs 124.5 lakh crore
• Deposits: 6.6% increase, reaching Rs 149.2 lakh crore

Will loan growth sustain?

Last financial year’s momentum in the flow of resources to the commercial sector seems to be sustaining in FY24, going by RBI Governor Shaktikanta Das’ August 2023 bi-monthly monetary policy statement.

In the financial year ending March 2023 fiscal year, the commercial sector saw a 31% year-on-year increase in resource inflow, according to the RBI’s Handbook of Statistics on the Indian Economy.

The proportion of resources provided by banks grew to 59 in FY23, up from 46% the previous year, while the contribution from non-banking entities decreased to 41%, down from 54% in FY22.

Scales Are Shifting

With loans outpacing deposits, banks have been pushed into a corner. The difference in growth rates has prompted speculation about what this means for interest rates, particularly Fixed Deposit (FD) rates.

Data Indicates Deposit Rate Rise

Let us look at the data on deposit and loan rates of banks, excluding small finance banks and rural banks.

According to the RBI, the Weighted Average Lending Rate on fresh loans and deposits have risen.

The table below shows how loan and deposit rates have risen for banks.

Source: RBI

The data shows loan rates have risen sharply while deposit rates have lagged.

It is only a matter of time before deposit rates too rise.

Loan-Deposit Tango

When loan growth outstrips deposit growth, banks have less liquidity.

Lower liquidity means banks may need to incentivize people to deposit more.

And how do they do this? By raising FD rates.

RBI, the Puppet Master

Banks are slow to raise deposit rates because there is systemic liquidity, and it could stay like that until the festival season is over.

That’s because the RBI does not want to play spoilsport and do anything that will raise loan rates during the festival season, as consumer sentiment could get hit.

But, with elections round the corner and RBI committed to lowering inflation, it is a matter of time before water seeks its level.

Remember that the RBI is committed to reducing liquidity to ensure that inflation reaches its target of 4%.

For perspective, Consumer Price Index-based inflation was at 6.83% in August.

What Should You Do?

Stay Informed

Knowledge is power. Stay abreast of RBI announcements and banking trends.

Check your bank’s website frequently to see whether they have changed deposit rates.

Re-evaluate Your Portfolio

If FD rates rise, it could be a golden opportunity to move some of your investments into fixed deposits.

Consult a Financial Advisor

For help on how much money you should have in Fixed Deposits, consult a SEBI-registered financial advisor to align your finances to your goals and risk profile.

Keep Your Eyes Peeled

As the banking sector navigates these turbulent waters, Fixed Deposit rates may be in for a change.

While it's all still up in the air, one thing's for sure: the financial landscape is anything but static.

So whether you're an investor or simply a curious observer, keep your eyes peeled and your ears open. It's a story that's far from over.