Good news for investors! Fixed deposit rates expected to remain high – here’s why your FD may pay higher for longer time

Fixed Deposit Interest Rates 2024: Analysts predict that deposit rates in India will remain high for an extended period due to strong credit growth, tight liquidity, and fierce competition for funds. Both large and small banks have raised their term deposit rates to secure funds for meeting credit demands.
Last week, State Bank of India (SBI) increased its fixed deposit (FD) rates in select tenures by 25 to 50 basis points.SBI is also offering a special 7.10% deposit rate for a 400-day tenure, valid until March 31, 2024. One basis point equals 0.01 percentage point.
Similarly, Kotak Mahindra Bank has raised interest rates on certain FD tenures above three years by 50 to 75 basis points. Meanwhile, DCB Bank, a smaller lender, has increased its FD rates by 10 basis points to 7.85% within the 12 months 1 day to 12 months 10 days tenure. It also offers 8% for 25 to 26 months.Analysts told ET that banks are compelled to increase deposit rates due to tightened liquidity in the banking sector and increased competition for deposits, as people have alternative investment avenues. Although deposit growth has improved, it still lags behind credit growth. Initially, banks anticipated a softening in deposit rates by Q4 of this fiscal year. However, it is now expected that these rates will remain high for a longer duration, according to Mona Khetan, Vice President-Research at Dolat Capital.
Banking sector liquidity has shifted from a surplus of around Rs 2.5 lakh crore in early August to a deficit of Rs 1.2 lakh crore after the government’s withdrawal of Rs 2,000 banknotes. The latest data from the Reserve Bank of India (RBI), excluding the HDFC merger impact, reveals that although credit growth has eased to 15.8% YoY from 17.4% last year, it still exceeds the 13.3% growth in deposits.

Analysts suggest that due to robust credit growth, banks will persist in their efforts to gather more deposits. Nitin Aggarwal, an analyst at Motilal Oswal, expects deposit rates to remain elevated at least until Q4 of the current fiscal year, as this period experiences high credit demand. However, the specific tenures and rates offered will be at the discretion of individual banks.

Aggarwal further predicts a 5 to 10 basis point year-on-year decline in margins for public sector banks and a 10 to 20 basis point easing in margins for private sector banks, mainly due to their reliance on term deposits.
With no signs of credit growth easing, analysts anticipate that the banking system’s loan growth will hover around 15% in the next fiscal year. This scenario will compel lenders to either continue offering higher rates to attract deposits or to curtail loan disbursals altogether, they say.