Tag: Bajaj Capital

Banks and non-banking finance companies have started increasing deposit rates across tenures, especially rates on longer-term FDs on likely recovery in credit demand and rising inflation.

The number of lenders offering higher rates may go up over the next few months.

HDFC, Bajaj Capital

Mortgage lender HDFC has increased rates on fixed deposits maturing between 33 and 99 months by 10-25 basis points for the first time in 29 months. HDFC said from March 30, fixed deposits of 33-month duration will fetch 6.2% annualised returns while fixed deposits with 66-month maturity will now fetch 6.6% interest rate and the 99-month deposits will receive 6.65% interest rate. Further, senior citizens would get 0.25% more on the above-mentioned rates. Worth mentioning here is that this is the first time after October 2018 that HDFC Ltd has raised deposit rates. In February, Bajaj Finance, another top-rated lender had raised interest rates on fixed deposits by 40 basis points. Fixed deposits from Bajaj Finance with tenures of three to five years earn 7%.

Negative rate prospects

The finance ministry gave a scare of a rate cut on small savings schemes as such a move would have put pressure on reduction in bank deposit rates.

With inflation above 5%, deposit rates are already threatening to veer into negative territory, any rate cut would be a double whammy for depositors.

Retail depositors have struggled during the pandemic to maintain their earnings and also ensure inflation doesn’t erode their savings.

If inflation continues to rise, banks will have to offer higher deposit rates to investors, who in sight of negative returns, may shift their money elsewhere.

Rates kept down

In 2020, due to the pandemic, the Reserve Bank of India’s (RBI) adopted an accommodative stance with measures to keep the policy rates down throughout the year. It also announced measures to infuse liquidity in the banking system to be able to provide affordable financing and hence, support economic growth. Extra liquidity also kept interest rates down. The credit offtake was low as banks adopted a cautious stance towards lending across all sectors of the economy, which led to lower rates.

Growth this year

However, the banking system’s credit growth will almost double to 10 per cent in 2021-22 on the economic recovery and policy interventions.

The economic growth pegged at 10.5% by RBI for FY21-22 and 12% by foreign rating agencies. From a banks’ credit growth perspective, the agency said the expansion will accelerate by 4-5 percentage points to 9-10 per cent in 2021-22.

The faster credit growth will be led by retail loans, which are expected to grow in mid-teens, while corporate loans, which de-grew during 2020-21, are also likely to show a 5-6 per cent jump. This is expected to be driven by investment demand from infrastructure and real estate sectors as well as the release of pent-up consumer demand, thus resulting in high growth in retail finance.

The growth and demand for credit is likely to push up fixed deposit rates in the next 3-9 months.

RBI measures

Contrary to its accommodative stance, RBI has already reduced its liquidity support to the market with no additional liquidity measures announced in the latest monetary policy review in February 2021. It has withdrawn the 1% Cash Reserve Ratio relaxation for banks and now the CRR must be brought up to 4% in two tranches. A hike in CRR will lead to a reduction in liquidity available with banks which may force them to look out for more funds from retail depositors to meet their credit demand, thus adding another factor that can result in higher deposit rates.