RBI is expected to increase CRR next month to signal a rate increase. In what could be the first sign of a rise in interest rates, bulk deposit rates have started rising. Deposits of over Rs 5 crore are usually classified as bulk deposits. At least three banks – Union Bank of India, Uco Bank and Oriental Bank of Commerce (OBC) – have increased the rate on one-year bulk deposits. According to market participants, as against 5–5.50 per cent last month, these banks have begun to offer 6.25–6.35 per cent on these deposits.
When the financial crisis intensified after the Lehman Brothers’ collapse, the Indian Banks’ Association advised banks not to quote bulk deposit rates beyond 6 per cent. In recent months, with low credit off-take and high liquidity, bulk deposit rates had dropped below those on retail deposits, which are also seen to be more sticky.
The market expects the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR), or the proportion of deposits that they set aside, next month to signal a rate increase. A higher CRR would result in liquidity tightening.
In addition to bulk deposits, even the rates on certificates of deposits have also gone up during the last fortnight.
The upward trend is reflected in shorter maturities, too. On Monday, Uco Bank placed Rs 400 crore of three-month CDs at 4 per cent while Canara Bank placed five-month CDs at 3.92 per cent. The rate on three-month CDs has moved up to 4 per cent from 3.15–3.45 per cent at the end of November, according to dealers.
Although some bankers said the northward movement was due to the usual quarter-end rush by banks to meet their targets and improve the top line, a section of bankers believe the increase in rates may be permanent. Bankers said they did not want to be caught off guard once RBI raised rates and credit growth picked up in the next quarter. In recent weeks, CD issues have increased. Dealers said that so far in December banks had raised close to Rs 25,000 crore through the route against Rs 15,000 crore in November.
The liquidity position has changed, with the amount of surplus funds that the banks parked with RBI through the reverse repo window below the Rs 40,000 crore-mark now, as against Rs 90,000 crore a week ago.
“Rates will certainly move up in January. So it is better to hedge now against any sharp movement as a result of the central bank’s action,” said the head of liabilities at a government bank.