Post office term deposits are now once again competitive with bank fixed deposits as the government has raised interest rates on small savings schemes three times in a row, making them more attractive to investors. The return on a two-year post office term deposit is now 6.9%, the same as what most banks offer on deposits of similar maturity. This comes after a series of repo rate hikes by the Reserve Bank of India since May 2022. The transmission of higher interest rates to retail deposit rates picked up pace in the second half of the last fiscal year as banks sought to attract retail deposits to fund robust credit growth.
The Weighted Average Domestic Term Deposit Rate (WADTDR) on fresh deposits, including retail and bulk, increased by 222 basis points from May 2022 to February 2023. In the first half of the fiscal year, banks focused on mobilizing bulk deposits, but in the second half, the increase in fresh retail deposit rates outpaced the increase in fresh bulk deposit rates. The transmission of higher rates to outstanding deposits is also increasing gradually, reflecting the longer maturity profile of term deposits contracted at fixed rates.
The government has increased interest rates on small savings instruments by 10-30 basis points for the October-December quarter of 2022-23, 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. The interest rates on these instruments had remained unchanged for nine consecutive quarters until the second quarter of 2022-23.
Interest rates on small savings instruments, which are administered by the government, are linked to secondary market yields on G-secs of comparable maturities. With the recent adjustments, rates on most of the small savings instruments are closely aligned with formula-based rates. The RBI claimed that as a result, bank term deposit rates are now competitively priced when compared to term deposit rates offered by the post office.
As of February 2023, the WADTDR on retail deposits of banks of 1-2 year maturity rose to 6.9% from 5.8% in September 2022 and 5.2% in March 2022. Meanwhile, the return on a two-year post office term deposit has increased to 6.9% from 5.5% in September 2022 and March 2022, and the rate on a three-year post office term deposit has increased to 7%.
It is important to note that banks have also revised upwards their external benchmark-based lending rates by 250 basis points during May 2022-March 2023 in tandem with the increase in the policy repo rate. The marginal cost of funds-based lending rate (MCLR) – the internal benchmark for loan pricing – rose by 140 basis points over the same period. The weighted average lending rate on fresh and outstanding rupee loans also increased significantly from May 2022 to February 2023.
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