Tight liquidity spells deposit rate hikes
Talk has begun of when central banks around the world will start lowering interest rates. Commercial banks in India, however, have been raising deposit rates. The Reserve Bank of India’s (RBI) 2.5 percentage point hike in its policy rate since May 2022 to fight inflation has been slow to reach depositors, who have only recently begun to get a better deal in real terms.
The actions of banks are driven by a liquidity crunch. Cash has been tight, especially after large outflows on account of quarterly advance tax payments. A large retail-level switch to other financial assets has also deprived banks of deposits.
To meet buoyant credit demand, banks need to attract more deposits. With inflation still elevated, RBI has kept liquidity conditions tight by design; tighter money is expected to restrain demand and help cool price pressures. So, deposit rate hikes are not out of sync with the central bank’s policy goal.
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