Will bank fixed deposit rates rise soon? Higher CD costs signal better returns for savers

Savers could see higher returns on bank deposits in the coming months as the cost of certificates of deposit (CDs), which had been viewed as a leading indicator for broader deposit rates, surged sharply in May amid tighter liquidity conditions and stronger demand for funds.

One-year CD rates are currently quoting at 7.70 per cent, up from around 7 per cent at the end of April, marking a rise of 60-70 basis points within a month, according to an ET report. One basis point equals one-hundredth of a percentage point.

The increase reflects growing pressure on banks to attract funds through large institutional deposits, usually involving ticket sizes of Rs 500 crore or more.

Bankers and analysts said the rise in CD rates could eventually translate into higher retail deposit rates even if the Reserve Bank of India (RBI) does not immediately increase 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, ET quoted.

"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," he added.

Market participants said tighter liquidity conditions appear to be driving the trend.

Tripathi pointed out that the gap between the one-year government treasury bill and the one-year CD rate has widened significantly. The 364-day treasury bill is currently quoting around 5.75 per cent, while the differential with CD rates has reached nearly 200 basis points against a normal range of 130-140 basis points.

"This indicates tighter liquidity for the banking system," he said.

Soumyajit Niyogi, director, core analytical group at India Ratings & Research, said the movement in CD rates clearly reflects tightening liquidity conditions.

"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," he added.

Average daily banking system liquidity has declined sharply to around Rs 50,000 crore from nearly Rs 3 lakh crore in April.

Bankers said the liquidity environment has become more challenging as fund flows into CDs from mutual funds have also moderated.

"Even the mutual fund money, which made its way to CDs has shrunk; so, all in all, we are in a tighter situation," a senior public sector bank official said.

"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," the official added.

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