State Bank of India Chairman CS Setty expects banks to not hike deposit rates for the next three months due to surplus liquidity in the banking system.

A day after the Reserve Bank of India (RBI) hiked repo rate by 25 basis points to 5.50%, Setty said the tightening of monetary policy will help banks to expand their net interest margins (NIMs) for up to three quarters.

"I believe that next two-three months, there may not be any rate action on the deposits because we have sufficient liquidity in the system," Setty told reporters.

The massive inflow of $133 billion in foreign currency non-resident (Bank), or FCNR(B), deposits under the RBI's swap facility has triggered excess liquidity in the banking system.

Setty, however, cautioned that banks may have to look at raising deposit rates to fund advances if credit growth stays elevated.

With lending rates going up, if deposit rates stay put the profitability of banks would expand. About 68% of loans are linked to external benchmark-based lending rates (EBLR), which will get repriced directly within three months. 

Setty said depositors need to be compensated with some level of positive real interest rate in a scenario where inflation is inching up so that they are attractive.

Asked if the RBI's rate hike and SBI’s research arm view of a 0.50% further increase would help NIMs, he said that should be the trend.

"...in the next 2-3 quarters, it (RBI rate hikes) is positive on the NIMS. People are expecting that the 75 bps will happen in 2 or 3 hikes. But whatever happens, I think this benefit (on NIMs) is available for 2-3 quarters," he said.

While the RBI has raised its FY27 inflation forecast to 5.2% and projected Q3 inflation at 6%, SBI Research expects CPI inflation to rise to around 6.8% in November.

Setty  said SBI will be able to sustain 14-15% credit growth. "While there is no ideal credit growth rate, at least in SBI, we believe that you have to be 2-3% more than the nominal GDP. If you are looking at a nominal GDP of 12%, 14-15% growth rate (in credit) is something that will sustain the momentum of the growth," he added.