State Bank of India (SBI) Chairman C.S. Setty has indicated that banks are unlikely to increase bank deposit rates for the next two to three months. This projection, made on Thursday, follows the Reserve Bank of India's (RBI) recent decision to raise the repo rate, typically a trigger for higher lending and deposit rates.
Setty attributed this temporary stability in deposit rates to the significant excess liquidity currently present within the banking system. He stated, “I believe that in the next two-three months, there may not be any rate action on deposits because we have sufficient liquidity in the system.”
RBI's Policy Shift and Market Impact
The RBI, on October 7, increased its repo rate by 25 basis points to 5.50%. This marked the first rate hike in nearly four years and signaled a shift in monetary policy from a neutral stance to calibrated tightening. The move is widely seen as a response to building inflationary pressures and has fueled expectations of further rate increases.
Despite the tightening cycle, Setty explained that the existing liquidity surplus will keep deposit costs stable in the near term. This scenario is particularly beneficial for bank profitability, as it allows lenders to capitalize on higher lending rates—many of which are linked to external benchmarks and reprice quickly after repo rate changes—without an immediate corresponding rise in their funding costs.
Setty expects that the RBI's rate hikes could positively impact banks' net interest margins (NIMs) for two to three quarters, providing a period of enhanced profitability.
Future Outlook for Deposit Rates and Economic Growth
While a near-term hold on deposit rate increases is anticipated, Setty cautioned that this situation might not last indefinitely. He suggested that if credit growth continues at its current elevated levels, some banks could eventually be compelled to raise deposit rates to secure necessary funding for advances.
SBI Research supports a tightening bias, projecting the repo rate to reach 6% by December 2026, with an additional 50 basis points of cumulative hikes if inflation accelerates as projected. The research arm anticipates consumer price index (CPI) inflation to climb to around 6.8% in November.
Meanwhile, the RBI has revised its GDP growth forecast for FY27 to 7.1%, driven by resilient services activity, capacity utilization, and robust credit growth. SBI itself expects to sustain a credit growth rate of 14-15%, believing that loan expansion 2-3 percentage points above nominal GDP will help maintain economic momentum.
For individual depositors, however, Setty acknowledged the need for banks to eventually provide a positive real interest rate as inflation rises, highlighting a potential future tension between protecting bank margins and ensuring the attractiveness of savings products.