Credit demand, low liquidity boost deposit rates at banks

Credit demand outpaced deposit growth, prompting lenders to raise rates. credit rose 20.2% as against 13.5% rise deposits for FY24, said the SBI report.

It said the weighted average domestic term deposit rates (WADTDR) on outstanding deposits rose 96 bps last fiscal year. It further pointed out that the deposit rates were raised in the second half of FY24.

Liquidity in the banking system had progressively tightened over 2023, barring a couple of months following the return of ₹2,000 banknotes into the system. In May 2023, the RBI had announced the withdrawal of ₹2,000 notes from circulation.

With the Reserve Bank of India announcing an incremental cash in August to impound the surplus funds that had flowed into the system due to the return of the ₹2,000 notes, banking system liquidity progressively turned tighter.

From August to January, the weighted average call rate (WACR), which is the operating target of the RBI's monetary policy, was broadly around 6.75%, 25 basis points higher than the central bank's prevailing repo rate of 6.50%. In January, the liquidity deficit, as measured by banks' borrowing from the RBI, rose to a multi-year high of ₹3.3 lakh crore.

The tighter liquidity, which was in keeping with the Reserve Bank of India's stance of withdrawal of accommodation, was due to a faster pace of bank credit growth than deposit growth as well as intermittent activities by the central bank in the foreign exchange market, a banker said.

The central bank intervenes in the foreign exchange market through dollar sales or purchases to smoothen out volatility in the rupee's exchange rate. Dollar sales drain out rupee liquidity from the banking system, he added explaining why liquidity tightened.