India’s largest bank State Bank of India (SBI) and largest private sector bank HDFC Bank were among a bunch of banks and financial institutions that increased the interest rates on their fixed deposits (FDs) recently. The banks have increased the rates even as the Reserve Bank of India (RBI) kept the policy rates unchanged in its monetary policy meet last week. Let’s understand why that’s happening.
Rising Rates
HDFC Bank has increased the interest rates on fixed deposits of less than Rs 2 crore by 5-10 basis points (bps). One bps is one-hundredth of a percentage point. The rates came into effect since February 14.
SBI has hiked interest rates on long-term FDs by up to 15 bps. The latest rates came into effect on February 15. The interest on FD from three years to less than five years has been increased from 5.3 per cent to 5.45 per cent. The rate has been increased for senior citizens, from 5.8 per cent to 5.95 per cent.
UCO Bank and Central Bank of India also revised interest rates on FDs recently. The revised interest rates are applicable on FD investments up to Rs 2 crore. These revised rates came into effect on February 10.
Ujjivan Small Finance Bank is offering an interest rate of 6.6 per cent for deposits with a tenure between 19-months-one-day and 24 months for individuals up to 60 years. They have hiked interest rate to 6.5 per cent for the tenure of 12 months.
Why Are FD Rates Rising?
According to experts, this sudden spurt in interest rates by banks is due to the bottoming out of the interest rate cycle. “The rates are expected to go up further but not as sharply as RBI is maintaining an accommodative stance. Also, banks have reached an inflection point whereby the credit demand is higher when compared with increase in deposits,” says Raj Khosla, founder and managing director at MyMoneyMantra, a loan aggregator.
Also, there is increasing pressure on RBI to hike policy rates due to the economic recovery in different industrial countries, leading to higher inflation and rising commodity prices.
As per a report by Morgan Stanley, policymakers in different parts of the world are loosening their monetary policies. RBI is yet to begin policy normalisation, which again depends a lot on the impact of the Omicron variant of the Covid pandemic on the economic activity. “However, we anticipate the lift-off and its quantum to be contingent on the impact of Omicron on economic activity. If the growth momentum remains durable, we would then expect that RBI could choose to hike the reverse repo rate 40 bps to adjust the policy rate corridor in one shot. Next, we expect this to be followed by a hike in the repo rate in April, with a cumulative rise of 150 bps in FY2023,” the report said.
