Last week, the RBI asked banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.
With the excess liquidity in the banking system getting absorbed due to the Reserve Bank of India’s (RBI) incremental cash reserve ratio (I-CRR) measure, banks are likely to raise deposit rates on select tenors to meet higher credit demand ahead of the upcoming festive season.
Last week, the RBI asked banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023. Lenders have to maintain I-CRR from the fortnight starting on August 12.
According to experts, banks will wait for a fortnight to gauge the liquidity situation, and demand for credit, and later take a call on the quantum of the increase in deposit rates. The hike in deposit rates could be in the range of 25-50 basis points (bps), they said. One basis point is one-hundredth of a percentage point.
“Banks could increase deposit rates by 25-50 basis points in different buckets depending upon the demand for credit and liquidity conditions in the coming few months. After a long time, competitive dynamics in the deposit market have intensified, mostly owing to revivals in credit demand,” said India Ratings and Research’s Director (core analytical group) Soumyajit Niyogi.
This increase will happen over the next two to three months, he added.
ICRA Ratings’ Senior Vice President, Co Group Head – Financial Sector Ratings, Anil Gupta, said banks may initially garner deposits by raising bulk deposits or by issuance of certificates of deposit (CD).
“Before banks start hiking retail deposit rates to increase deposit mobilisation, there will be an increase in bulk deposit rates on short-term tenors or the issuances of certificates of deposit will go up,” he said, adding that there could be an increase of 25-30 bps on bulk deposits and CD rates. Bulk deposits are single rupee term deposits of Rs 2 crore and above. A Certificate of Deposit (CD) is a negotiable, unsecured money market instrument issued by a bank as a usance promissory note against funds deposited at the bank for a maturity period of up to one year. A CD issued by banks are subscribed to by corporates and mutual funds.
While announcing the monetary policy on August 10, Reserve Bank of India (RBI) Governor Shaktikanta Das said the I-CRR is purely a temporary measure for managing the liquidity overhang generated due to the return of Rs 2,000 notes to the banking system, the central bank’s surplus transfer to the government, pick up in government spending and capital inflows.
On May 19, RBI announced the withdrawal of Rs 2,000 notes from circulation, while maintaining its legal tender status. As on May 19, the total value of Rs 2,000 notes in circulation was Rs 3.56 lakh crore.
As on July 31, the RBI received Rs 3.14 lakh crore worth of Rs 2,000 notes, or 88 per cent of notes in circulation. Of this, about 87 per cent were in the form of deposits and the remaining around 13 per cent had been exchanged into other denomination banknotes.
Higher deposits in banks increased the liquidity situation. The overall daily absorption under the liquidity adjustment facility (LAF) was Rs 1.7 lakh crore in June and Rs 1.8 lakh crore in July 2023.
Das said even after the temporary impounding of liquidity, there will be adequate liquidity in the system to meet the credit needs of the economy. The I-CRR will be reviewed on September 8, 2023, or earlier to return the impounded funds to the banking system ahead of the festival season, the governor had said.
