Why your bank deposit rates won’t go up much

With the RBI hiking repo rate for the second time this year on August 1, you may be hoping that deposit rates will soon climb back to the 9% plus levels of 2011-12 or 2013-14. That may not happen (we are not talking about the 3-4 banks that offer high rates to capture market share). How can we be certain about this? Simple logic: the price/cost of anything, including the rate of deposits is determined by demand and supply.

Less Demand than supply

Banks borrow from you through deposits to lend to companies and individuals. Bank lending may seem to be healthy but that comes entirely from the retail loans. Loans of banks to industries account for a larger chunk than retail loans and this has remained stagnant. In other words, there isn’t much lending happening. That means there isn’t enough demand for bank money. In the absence of such demand, banks have little incentive to pay more to get your funds. Banks are most motivated to hike your deposit rates when they need the money to lend at a faster pace. This was the case in every cycle where you saw a higher deposit rate.

However, this is not the case now. Let us take a simple metric – the Credit-Deposit Ratio of banks as put out by RBI. As of March 2018, this stood at 75.6%. In high deposit rate periods, this ratio has been a healthy 80% and even closet to 90% in the case of private sector banks.

Those were periods when banks were enticed to borrow from you at high rates as the demand for credit was high. Now with demand for industrial credit still remaining muted, a case for hiking lending rates is also low. So, when lending rates cannot be hiked, why would deposit rates go up?

Banks hold back lending

Added to this, the NPA pile up in banks has meant that banks will consciously go slow on lending aggressively to companies and hence will be in no hurry to take deposits at high rates from you. Even where banks lent, the average lending rate has been higher than the rate at which a company could have borrowed in the debt market (data up to May 2018). That meant little incentive for companies to go to banks.

Banks’ loss is the debt markets’ gain. More credit requirement has moved from bank to debt markets and that has meant more opportunities (provided fund managers sift through the risks) for debt funds. Now you know why the yield to maturity (YTM) of your funds can be far higher than deposit rates. Because the demand remains healthier in the debt market.