Banks’ FD rates unlikely to rise further in 2024

Banks’ FD rates unlikely to rise further in 2024

Having moved upward during 2023, fixed deposit (FD) rates of the banks are unlikely to rise in the current year. Easing of liquidity tightness in the banking system in the coming months and expectations of a repo rate cut by the Reserve Bank of India (RBI) in the middle of this year will prompt lenders to apply brakes on any further hike in fixed deposit rates.

The upward movement of FD rates last year was mainly driven by a series of repo rate hikes by the RBI which started in May 2022. After raising the repo rate by 250 basis points since May 2022, the central bank has not hiked its policy rate since February 2023. Bankers believe that the transmission of repo rate hikes in banks’ deposit rates is nearly complete.

The country’s largest lender had last week raised rates on fixed deposits. However, it only hiked rates for deposits having maturity of up to one year, leaving the same on longer-tenure FDs untouched. “Longer tenure, we had increased some time back, so there is no room for further increase in those buckets,” Khara said.

Axis Bank and Bank of Baroda also hiked rates on fixed deposits of select maturities last week. The previous year turned out to be a good one for depositors as banks raised rates on FDs to meet their credit requirements. Tight liquidity, coupled with high demand for loans, compelled lenders to offer high rates on FDs. Smaller banks, in a bid to attract depositors, took an aggressive stance, causing the rates on fixed deposits to surpass the 9% mark in 2023.

“Deposit rates will be a function of the Monetary Policy Committee (MPC) rate as well as liquidity conditions in the economy. We expect the liquidity conditions to be balanced for most of 2024. So, the driving force behind the deposit rates shall be the MPC rate decisions,” said Vivek Iyer, partner, Grant Thornton Bharat. “We expect the MPC rates to be at the same level for most of 2024 given external uncertainties, and hence we expect the deposit rates to remain at the same levels.”

Deposit growth lagged the credit growth last year, which also prompted banks to hike rates. Banks credit offtake increased 20.8% year on year (YoY) to reach Rs 156.2 trillion for the fortnight ending December 1 while deposits rose at 13.4% for the fortnight to reach Rs 198.8 trillion.

“I would expect bank deposit rates to remain at present levels for some time to come before heading lower, that too maybe marginally. Deposit rates have a direct correlation to prevailing interest rates in the market and liquidity,” said Manish Kothari, president and head – commercial banking, Kotak Mahindra Bank.

Experts suggest that banks will be hesitant to increase fixed deposit rates as they anticipate a shift in the interest rate cycle from the middle of this year and any further hike will hurt their net interest margins.