The Great Bank Deposit War

People who are parking their money in a fixed deposit are finding out there is a battle among banks for customers to deposit in their corporation. There is a rise in interest rates the banks are offering interest rates at an increasingly high interest rates. 

Who has increased the deposit and by how much?

SBI has raised interest on retail deposits to 6.75 per cent from 6.1 per cent. IDFC first, HDFC,  and Axis bank are at 6.5 per cent, and Kotak Mahindra has hiked the interest rate to 7 per cent. Other banks have increased their term deposit rates too.

But why are banks hiking their interest rates?

Prima facie the reason is rising policy rates, intense competition between banks for sourcing deposits, elevated credit offtake (demand for loans are going up), and widening credit-deposit gap, that is, there is not enough deposit with banks to supply loans. Due to this, there is no liquidity in the market, which comes primarily from banks. Added to this is inflation in the market. Further, the repo rate by the central bank has become 6.25 per cent from 4.4 per cent in May this year. This will make loans from the central bank expensive for local banks. The local banks will in turn increase the loan lending rates to the population. Given the high-interest rate, there will be fewer loans pumped out in the market. Despite these factors, there is an increase in demand for loans by the population. 

If the banks elevate the interest rates they will attract more deposits and subsequently banks can give out more loans. This has sparked a deposit war amongst banks. As per RBI, annual credit growth demand is at a decade-high of 17.95 per cent as of October 2022, compared to a five-year average of 9.7 per cent. The fixed deposits have grown by 9.2 per cent year on year, and demand deposits have risen by 12.7 per cent. A look at these numbers clearly indicates that there is a gap between the deposit rate and loan demand rate. The deposits are less also due to alternative saving and investment mechanisms like equity or share markets, or SIP in mutual funds, etc.

What is real and nominal interest rates?

They are rates adjusted for inflation and have turned positive for deposit tenors after nearly three years. Whereas in nominal the interest rate the rates of inflation are not adjusted. The real interest rate indicates the actual borrowing cost or return on savings after taking into account the impact of inflation. It provides consumers with a fuller picture of how interest rates affect their finances in the long term. It is the real interest rate that matters when it comes to bank deposits and returns. We are at an interesting juncture where one would expect less and fewer loan demands from business owners and people in general, but on the contrary, there is a rise in demand for loans. This situation has brought about a unique situation where banks are fighting to attract customers.