According to an analysis by ICRA Ratings, indicating the rising deposit rate regime, certificates of deposit, which are heavily used by banks to borrow money, are on a steady rise and are already at several-year highs.
According to an analysis by ICRA Ratings, indicating the rising deposit rate regime, certificates of deposit, which are heavily used by banks to borrow money, are on a steady rise and are already at several-year highs.
Given the rising interest rate regime as well as rising credit demand, banks will be forced to sharply hike their deposit rates in the coming months, said a report on July 28.
According to an analysis by ICRA Ratings, indicating a rising deposit rate regime, certificates of deposit (CDs), which are heavily used by banks to borrow money, are rising steadily and are already at several year highs. are on.
The agency said that as of July 1, 2022, 1.5% of total deposits, CDs are yet to touch the peak level of June 2011, when they were 8.3% of total deposits.
Similarly, the spread of CDs at banks’ average deposit rates is increasing rapidly as increases in deposit rates are more calibrated. As a result, banks with a high share of bulk/interest-rate-sensitive deposits saw a sharp increase in financing costs, the report said.
The report said that the dependence of banks on CDs has been increasing in recent months so that the outstanding amount of CDs has increased by 243% to 2.4 lakh crore by July 1, 2022.
Also, the increase in bond yields and consequently the difference between the yield on CDs compared to average card rates on bank deposits on CDs has widened. The spread on bank CDs rose by 170 basis points (bps) from their average six-month deposit rates in July, compared to just 30 bps in April 2022.
While banks are more calibrated in increasing their card rates on deposits, interest rate hikes on deposits will be aggressive in the coming months as credit growth picks up, leading to a drop in the liquidity of the banking system, the report noted. Without being told how much the level can rise.
As the market enters a seasonally busy period for incremental credit demand, systemic liquidity will further ease as deposit growth lags behind incremental credit growth. “We also expect a hike in the repo rate by 60 bps to 5.5% by September, which will push yields on various benchmark instruments like T-bills and hence bank CD rates, thereby increasing the spreads even higher than bank deposits. Rates. This will force banks to aggressively pursue deposits by offering higher rates in the next three quarters,” feels the agency’s vice-chairman Anil Gupta.
A 90-bps hike in policy rates since May has resulted in a sharp rise in yields on various money market instruments as well as bonds, while floor rates have risen 130 bps during the period. As surplus liquidity eases, money market rates are now fixed at the repo rate instead of the reverse repo rate, as was the case when the COVID-19 pandemic began.
As a result, the daily average yield on short-term instruments such as 91-day T-bills, 182-days T-bills and 364-days T-bills rose to 5.2%, 5.7% and 6%, respectively. from 3.8%, 4.3% and 4.6% in July 2022, respectively, in March 2022.
The impact of rising rates has been borne by the corporate bond market, with the corporate bond market falling to a four-year low in the first quarter amid high investor risk aversion due to fear of mark-to-market losses. This prompted large borrowers to shift to banks for their incremental financing needs, leading to a spurt in bank credit growth, which is the highest in the past three years, even though deposit growth has lagged behind credit growth.
Since large bulk depositors have alternative options to park surplus funds at rates set by the market, banks with a high share of bulk funds or rate-sensitive deposits will have to sharply increase their deposit rates. This will prompt other banks to increase their deposit rates as well, Mr. Gupta said.