A liquidity surplus typically cools overnight and short-term G-sec yields, which form the floor for corporate borrowing costs.
Although the Reserve Bank of India has announced liquidity measures for mid-December infusing ‘1.45 lakh crore, it may not be sufficient as these infusions coincide with advance tax payments estimated at ‘2-2.5 lakh crore, draining funds from the banking system. Secondly, any further intervention from foreign exchange can drain rupees from the banking system.
RBI has likely stepped in to prevent excessive depreciation in the rupee, which breached 90 per $ for the first time on December 3. Average system liquidity stood at ‘1.68 lakh crore in November and ‘2.63 lakh crore in December so far, the Reserve Bank of India data showed. Liquidity was about 0.8% of NDTL in November, according to IDFC First Bank.
“I don’t think deposit rates will fall that sharply, and they’re unlikely to drop right away. But as the RBI starts adding more liquidity into the system, it should gradually push deposit rates lower. It’s important that the RBI keeps liquidity at a comfortable level – that is, 1% of NDTL (Net Demand and Time Liabilities). If that happens, the policy rate cuts will eventually feed through to deposit rates as well,” said Shailendra Jhingan, head of treasury at ICICI Bank, told ET.
Jhingan expects the RBI to provide additional liquidity support of ‘1.5 lakh crore without FX intervention. Gaura Sen Gupta, chief economist at IDFC First Bank, expects ‘1-2 lakh crore of support via OMOs and swaps. She sees ‘1 lakh crore of liquidity drain from FX operations and currency leakage in Q4.
Axis Bank‘s treasury head said they would watch market reaction before lowering deposit rates. “We will see how the market reacts. Assets will reprice, liability repricing remains to be seen. So yes, there is going to be an impact, but it also depends on how the liquidity in the system plays out in the last quarter of the year, where you typically tend to see a bit of a chase for deposits,” Neeraj Gambhir, head of treasury at Axis Bank, told ET.
However, Ashwini Kumar Tewari, MD at India’s largest bank State Bank of India, told ET on Friday, “Deposit rates have already come down and from our perspective, we also want to take care of the interest of our depositors. Of course, our asset-liability committee will meet and decide, but the scope for further reduction in deposit rates is limited.”
Since February, when the rate easing cycle began, fresh deposit rates have fallen 92 basis points to 5.57% as of October, while outstanding deposit rates have moved only 24 basis points to 6.78%. On the lending side, fresh loan rates have dropped 76 basis points to 8.64%, while outstanding lending rates have risen by 56 basis points to 9.24%, RBI data showed.