Lenders increased deposit rates by an average of 96 basis points during the financial year 2024 despite the Reserve Bank of India (RBI) maintaining policy rates steady since February 2023. According to a State Bank of India research report released this week, there have been industry-wide endeavors to mobilize deposits in order to address continuous credit demand amidst decreasing liquidity. One basis point is equivalent to a hundredth of a percentage point.
ET quoted the State Bank of India report saying, the demand for credit exceeded the growth in deposits, leading lenders to increase rates. The State Bank of India report mentioned that bank credit increased by 20.2% compared to a 13.5% growth in deposits during the financial year 2024.
The report mentioned that the weighted average domestic term deposit rates (WADTDR) for existing deposits increased by 96 basis points in the previous fiscal year. Additionally, it highlighted that the deposit rates were raised during the latter part of the financial year 2024.
The liquidity within the banking system had been gradually constricting throughout the year 2023, except for a few months subsequent to the reintroduction of Rs 2,000 banknotes into the system. In May 2023, the RBI declared the removal of Rs 2,000 notes from circulation.
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Following the announcement by the Reserve Bank of India in August regarding an additional cash reserve ratio to seize the excess funds entering the system as a result of the reissue of ₹2,000 notes, the liquidity in the banking system began to tighten gradually.
Between August and January, the weighted average call rate (WACR), serving as the operational focus of the RBI’s monetary policy, averaged approximately 6.75%, surpassing the central bank’s current repo rate of 6.50% by 25 basis points. By January, the liquidity shortfall, gauged through banks’ borrowing from the RBI, escalated to a multi-year peak of Rs 3.3 lakh crore.
The increased tightness in liquidity, aligning with the Reserve Bank of India’s policy of reducing accommodation, stemmed from a quicker rate of bank credit expansion compared to deposit growth, along with sporadic interventions by the central bank in the foreign exchange market.
A banker explained that the central bank engages in the foreign exchange market by either selling or buying dollars to mitigate fluctuations in the rupee’s exchange rate. Dollar sales drain rupee liquidity from the banking system, he added, elucidating the reason behind the tightening liquidity.
