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AMID the volatility in various asset markets such as equity and commodities, retail investors may prefer to go for fixed income avenues. But the situation is not very encouraging there as well. Banks' deposit rates are currently at 5-year low and real rate of return (adjusted for inflation) is negative.
All these coupled with the talk about interest rate hikes by the Reserve Bank of India has raised hopes for rise in deposit rates. A round of small increase in deposit rates by March end by most nationalised banks supported the sentiments. But it was quite minimal and not exactly a turnaround. So the question lingering on retail investor's mind is when the deposit rates are going to rise?
To get a clear picture on deposit rates, there is a need to understand the liquidity situation prevailing in the economy. It is known fact that the auction of 3G spectrum and advance tax outflow has mopped up the liquidity from the system. The situation was so tight that the RBI had to intervene by injecting money into the system through bond purchase. But is the macroeconomic situation ripe for a sustainable increase in interest rates and hence deposit rates up?
The answer is a cautious yes. Once the government begins its expenditure programme in coming months, the liquidity situation will ease. Nonetheless, it is unlikely to be as comfortable as observed before June. It is because the gap between the credit disbursement and deposit accretion is shrinking.
Sharp surge in incremental credit deposit ratio confirms the same. The ratio was around 40% during October-November 2009. Now it was more than doubled and stood at 98% as on June 18, 2010. While non-food bank credit has grown by 19.6% as on June 18, 2010, the term deposits recorded growth of 13.9% in the same period.
Going forward, this gap between the deposit and credit growth is likely to widen. With resilient consumption demand and increased business optimism, the industrial activity is gathering speed. It was clearly revealed in unabated growth in the industrial production.
The industrial growth for FY10 was 10% and anticipated to continue at the same pace. As a result, the demand for working capital and long-term investment credit demand is likely to pick up. The effects will be seen once the busy season sets in since October.
The bankers are expecting credit growth of 20% for FY11. Unlike to the previous credit cycle observed during 2004-2008, the investment-deposit ratio of banks was relatively low this time. It provides a little scope to redeem their investments to meet increasing credit demand. Thus the banks will leave with no option but to increase deposit rates.
The flattening yield curve suggests the same (see chart). The yield on short-term maturity has already gone up in the first quarter of FY11.
But the pace of increase in deposit rates will be gradual. Unless the credit demand gathers momentum followed by liquidity crunch, the deposit rates are unlikely to see rapid movement. Considering the current environment and fears regarding moderation in global economic growth, the domestic investment or industrial activity is unlikely to be robust. Once the clouds get over in the coming 2-3 months, the tone will be set in and deposit rates may move in the first quarter of CY2011. Till then one needs to wait and watch.
pallavi.mulay@timesgroup.com
All these coupled with the talk about interest rate hikes by the Reserve Bank of India has raised hopes for rise in deposit rates. A round of small increase in deposit rates by March end by most nationalised banks supported the sentiments. But it was quite minimal and not exactly a turnaround. So the question lingering on retail investor's mind is when the deposit rates are going to rise?
To get a clear picture on deposit rates, there is a need to understand the liquidity situation prevailing in the economy. It is known fact that the auction of 3G spectrum and advance tax outflow has mopped up the liquidity from the system. The situation was so tight that the RBI had to intervene by injecting money into the system through bond purchase. But is the macroeconomic situation ripe for a sustainable increase in interest rates and hence deposit rates up?
The answer is a cautious yes. Once the government begins its expenditure programme in coming months, the liquidity situation will ease. Nonetheless, it is unlikely to be as comfortable as observed before June. It is because the gap between the credit disbursement and deposit accretion is shrinking.
Sharp surge in incremental credit deposit ratio confirms the same. The ratio was around 40% during October-November 2009. Now it was more than doubled and stood at 98% as on June 18, 2010. While non-food bank credit has grown by 19.6% as on June 18, 2010, the term deposits recorded growth of 13.9% in the same period.
Going forward, this gap between the deposit and credit growth is likely to widen. With resilient consumption demand and increased business optimism, the industrial activity is gathering speed. It was clearly revealed in unabated growth in the industrial production.
The industrial growth for FY10 was 10% and anticipated to continue at the same pace. As a result, the demand for working capital and long-term investment credit demand is likely to pick up. The effects will be seen once the busy season sets in since October.
The bankers are expecting credit growth of 20% for FY11. Unlike to the previous credit cycle observed during 2004-2008, the investment-deposit ratio of banks was relatively low this time. It provides a little scope to redeem their investments to meet increasing credit demand. Thus the banks will leave with no option but to increase deposit rates.
The flattening yield curve suggests the same (see chart). The yield on short-term maturity has already gone up in the first quarter of FY11.
But the pace of increase in deposit rates will be gradual. Unless the credit demand gathers momentum followed by liquidity crunch, the deposit rates are unlikely to see rapid movement. Considering the current environment and fears regarding moderation in global economic growth, the domestic investment or industrial activity is unlikely to be robust. Once the clouds get over in the coming 2-3 months, the tone will be set in and deposit rates may move in the first quarter of CY2011. Till then one needs to wait and watch.
pallavi.mulay@timesgroup.com
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