CD rates on the rise could soon bring more on retail deposits

Mumbai: Costs on certificates of deposit (CD), often seen as a leading proxy for the broader retail deposit rates, rose 60 to 70 basis points in May compared with April, pointing to the likelihood that banks would soon begin offering savers more returns for parking funds with them.

One basis point is a hundredth of a percentage point.

One-year CD rates are quoting at 7.70%, compared with around 7% at the end of April as tighter liquidity and demand for funds compel banks to offer higher rates for large institutional deposits, typically with a ticket size of ₹500 crore or more.


Bankers and analysts expect the price of deposits to go up, eventually buoying retail deposit rates, even if the Reserve Bank of India (RBI) does not immediately raise policy rates. To be sure, the quantum of increase in deposit rates would be in line with the rise in policy rates.

"Higher CD rates definitely indicate that money is becoming more expensive. It is correct to say that deposit rates will go higher, but when and how much will depend on how the RBI moves from here," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank. "The longer end of the CD curve is pricing in a repo hike sooner or later this year. Deposit rates are likely to move upwards."

Liquidity Crunch

Tripathi pointed out that the gap between the one-year government treasury bill, the short tenure borrowing benchmark for the government, and one year CD rate is now 200 basis points. In normal course, that differential is 130 to 140 basis points, indicating tighter liquidity for the banking system. The 364-day t-bill is quoting around 5.75%.

Soumyajit Niyogi, director, core analytical group, India Ratings & Research, said the firmed up CD rates clearly point to tighter liquidity in the banking system.

"It is fair to assume that retail deposit rates will also move up. System liquidity has shrunk further from about 2.5% of banking deposits in March to about 0.5% of deposits now," Niyogi said. "Going forward, as banks are expected to disburse large credit as part of the govt package to MSMEs, there will be more pressure on liquidity. We should expect deposit rates to go up from here."

Average daily banking system liquidity has shrunk to about ₹50,000 crore from about ₹3 lakh crore in April. Bankers said all these facets point to more expensive deposits. "Even the mutual fund money, which made its way to CDs has shrunk; so, all in all, we are in a tighter situation," said a senior public sector bank official.

Of course, it all depends on how and when RBI moves with the benchmark repo rate, which will force banks' hands to raise deposit rates," said a senior public sector bank official.