Because the government has raised interest rates on small savings plans three times in a row, which has made them more appealing to investors, post office term deposits are now competing with bank fixed deposits once more.
The return on a two-year post office term deposit is currently 6.9%, which is the same as what the majority of banks offer on deposits with a similar maturity. This comes after a progression of repo rate climbs by the Reserve Bank of India since May 2022.
As banks sought to attract retail deposits to fund robust credit growth, the transmission of higher interest rates to retail deposit rates picked up steam in the second half of the previous fiscal year.
From May 2022 to February 2023, the Weighted Average Domestic Term Deposit Rate (WADTDR) on retail and bulk fresh deposits increased by 222 basis points. Banks focused on mobilizing bulk deposits during the first half of the fiscal year; however, in the second half, the increase in rates for fresh retail deposits outpaced the increase in rates for fresh bulk deposits.
Due to the longer maturity profile of term deposits contracted at fixed rates, the transmission of higher rates to outstanding deposits is also increasing gradually.
For the October-December quarter of 2022-23, the government has increased interest rates on small savings instruments by 10-30 basis points, 20-110 basis points for the January-March quarter of 2022-23, and 10-70 basis points for the first quarter of the current fiscal year.
Up until the second quarter of 2022-23, the interest rates on these instruments had not changed for nine consecutive quarters.
Secondary market yields on G-secs with comparable maturities are linked to interest rates on government-managed small savings instruments. Rates on the majority of small savings instruments are closely aligned with formula-based rates as a result of recent adjustments.
The Reserve Bank of India (RBI) asserted that as a result, bank term deposit rates are now competitive with post office term deposit rates.
The WADTDR on retail deposits of banks with a maturity of one to two years increased to 6.9% in February 2023, up from 5.8% in September 2022 and 5.2% in March 2022. In the meantime, the rate of return on a two-year post office term deposit has increased to 6.7 percent, up from 5.5 percent in September 2022 and March 2022, and the rate of return on a three-year post office term deposit has increased to 7%.
It is important to note that banks have also raised their external benchmark-based lending rates by 250 basis points in conjunction with the rise in the policy repo rate between May 2022 and March 2023.
During the same time frame, the internal benchmark for loan pricing, the marginal cost of funds-based lending rate (MCLR), increased by 140 basis points. From May 2022 to February 2023, the weighted average lending rate on new and outstanding rupee loans also significantly increased.
