ICICI Bank Ltd and Axis Bank Ltd, the country’s largest and third largest private lenders, have raised deposit rates by 25-30 basis points (0.25-0.3%) on longer tenure maturities, raising doubts on whether banks will cut lending rates even if the central bank eases its monetary policy in Tuesday's review.
The Reserve Bank of India (RBI) is widely expected to reduce the repo rate for the first time in nine months when it announces its third quarter policy review.
The rate is the rate at which the central bank lends money to banks. One basis point is one-hundredth of a percentage point.
A rise in deposit rate raises the cost of funds for banks, which comes in the way of a lending rate cut.
While ICICI Bank has revised the deposit rate by 25 bps (0.25%) in the two to five years bucket, for Axis Bank, the deposit rate hike is up to 30 bps (0.3%) on select categories. ICICI Bank's rate hike came into effect from 26 January, while for Axis Bank, the rate hike was effective January 24.
"We have increased the deposit rates in certain tenures and not across the board. The move is aimed to correct the mismatch in our asset-liability position. The rate hike was mostly on deposits with longer maturity," a senior official of Axis Bank said, requesting anonymity.
Axis Bank is currently offering a maximum of 9.30 per cent on domestic deposits of less than Rs 5 crore. The bank's spokesperson confirmed the development.
"For deposits up to Rs 1 crore, for four tenures ranging from 18 months to five years, interest rate has been increased by 30 basis points from 9.00 per cent to 9.30 per cent," the spokesperson said.
In its monetary and macroeconomic development report released on Monday, the central bank has cautioned about the increasing wedge between credit and deposit growth and said the widening wedge posed a concern as it was likely to worsen the tight liquidity condition.
"The deceleration in the term deposits, which constitutes the major component of aggregate deposit, could be largely attributed to the low and declining real interest rates on time deposits. Moreover, with an increase in the wedge between credit and deposit growth, banks are likely to tap the inter-bank market to fund this gap," RBI said.
According to Dhananjay Sinha, co-head for institutional research, economist and strategist at Emkay Global Financial Services, these deposit rate hikes will make monetary transmission modest.
"There is a liquidity deficit in the system, which may have prompted these banks to hike their deposit rates. It is a difficult situation as the gap between credit and deposit growth is widening. In this scenario, even if RBI cuts rate on Tuesday, the effectiveness of that action will be significantly neutralised. Unless deposit growth picks up or credit growth moderates transmission of policy rate cut will remain modest. I expect this situation to continue for next six to eight weeks," Sinha added.