Even after India has moved to a rate-hike cycle, banks may take time to raise fixed deposit (FD) rates as they have a huge stock of foreign currency non-resident (Bank), or FCNR(B), deposits. 

Non-banking financial companies (NBFCs), however, do not have that luxury as they are not allowed to source FCNR deposits. After the Reserve Bank of India’s 25-basis-point rate hike, Bajaj Finance has increased interest rates and other NBFCs are expected to follow suit.

Banks have the cushion of a record FCNR(B) deposits inflow of $133 billion under the RBI’s concessional swap facility, which is expected to take care of funding credit demand for at least the next three months. Since the banking system is flushed with liquidity, banks need not be under pressure of increasing deposit rates. The next quarter could result in higher net interest margins (NIM) for banks as lending rates linked to the repo rate will immediately go up.

But deposit rates will have to rise as liquidity drains out. The pressure will build up if demand for bank loans stays strong and  parallelly credit continues to outpace deposit growth. As on 2 October, RBI data showed that the credit-deposit ratio stood at 80.83%.  Though the ratio is better than 81.96% as on 31 July, it is still uncomfortably high at above 80%.

According to a report by Nomura, the banking system’s liquidity surplus peaked at Rs 9.85 trillion on 15 September and then eased to Rs 4.7 trillion by 30 September. 

RBI Governor Sanjay Malhotra expects the liquidity surplus to likely normalise within this financial year. Currency leakage, reserve requirements and the RBI’s liquidity operations will ensure that surplus liquidity will not be a very long-term phenomenon.  An estimated Rs 3 trillion to Rs 4 trillion is the general currency in circulation leakage. 

The RBI has also been draining some of the surplus through open market operation (OMO) sales, sell-buy swaps and variable rate reverse repo (VRRR) operations. The intervention in the foreign-exchange market to support the rupee has also been a drag on liquidity.

“With all these things, I do not expect that the liquidity is going to remain in such high surplus mode for a very long period,” Malhotra said.

Analysts say banks are unlikely to move deposit rates now but the liquidity situation could go to a neutral state by  the end of December. The RBI is also expected to further raise repo rate in its December bi-monthly policy in a bid to slow rising inflation.

Last month, State Bank of India Chairman CS Setty said that the excess liquidity due to a surge in FCNR(B) deposits would get absorbed and the inflows deployed over the next three to four months.

While banks could restrain themselves from hiking deposit rates immediately, Bajaj Finance raised its FD rates by up to 40 basis points just after the RBI took the repo rate up by 25 basis points to 5.50%. For fresh deposits, the highest cumulative rate on offer is 7.75% for 31 to 60 months, up from 7.40%. 

As RBI has moved to a rate-hike cycle, other NBFCs are expected to follow Bajaj Finance in raising FD rates.