HDFC Bank, over the weekend, raised deposit rates by a sharp 50-150 bp, which follows the 25-50 bp rate hike by ICICI Bank and IDBI earlier this month. Notably, this deposit rate action has come, even as system liquidity currently appears adequate (reverse repo outstanding at about USD 15 bn). As the loan growth (14.8% currently) accelerates and central bank tightens, this liquidity will also dry up soon.
As deposit growth (17%YoY) has fallen to a four-year low, with real deposit rates negative, banks need to raise rates. With these rate actions, SBI and ICICI deposit rates are now at a 50-100 bp discount and they will now need to follow suit.
Re-pricing benefits on legacy term deposits are still coming through and bank NIMs will expand QoQ in 4Q FY10. However,
on account of these recent rate actions and higher effective rate on savings deposits (from 1 April 2010), we expect 4Q10 NIMs to be at a near-term peak.