Recent sharp reduction by as much as 200 basis points in last two years has diverted a lot of investment from once considered highly safe and lucrative investment option; term deposits with banks to other asset class including mutual funds and stocks. But the recent off take in credit which has risen by 10.7% as of December 22 as against the 4.7% last year may push banks to revise deposit rates higher on short term deposits in few months time.
Understanding deposit vs credit dynamics
Banks cannot lend all they have as deposits as they are mandatorily required to keep some percentage as cash reserve ratio (CRR) and to some degree as statutory liquidity ratio (SLR) with the government. And currently CRR and SLR stands at 4% and 19.5%
And as the credit demand is picking up and deposits with the bank are not increasing in the same proportion, there is creating a pressure on the deposits which the institutions are now tapping for meeting the demand for loan.
Also banks are selling extra government bonds with them to meet the credit demand but any huge selling on their part in which banks hold a majority stake may prove hard on the yield which has surpassed 7% level.
Deposit rates can also see an upside as the fiscal slippage concerns and rising crude oil price leave probably no room for rate cuts by the monetary policy committee.