No deposit rate hikes for 2-3 months: SBI Chairman C.S. Setty explains why

State Bank of India Chairman C.S. Setty expects banks to hold off on raising deposit rates for the next two to three months, as excess liquidity in the banking system reduces the immediate need to compete for deposits.

“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,” Setty said on Thursday, a day after the Reserve Bank of India raised the repo rate by 25 basis points to 5.50%.

The RBI’s October 7 decision marked its first rate hike in nearly four years and was accompanied by a shift in its monetary policy stance from neutral to calibrated tightening. The move has raised expectations of further rate increases as inflationary pressures build.

Despite the tightening cycle, Setty said the current liquidity surplus should keep deposit costs stable in the near term. However, he cautioned that banks could eventually be forced to increase deposit rates if credit growth remains elevated.

“If the credit growth continues at the ongoing elevated levels, some banks may have to look at raising deposit rates to fund the advances,” he said.

The outlook is significant for bank profitability because a delayed increase in deposit rates could allow lenders to benefit from higher lending rates without an immediate corresponding increase in their funding costs.

Setty said the RBI’s rate hikes could therefore support banks’ net interest margins (NIMs) for two to three quarters. More than 50% of loans in the banking system are linked to external benchmark-based lending rates, allowing lending rates to reprice relatively quickly when the repo rate changes.

“In the next 2-3 quarters, it (RBI rate hikes) is positive on the NIMS. People are expecting that the 75 bps will happen in 2 or 3 hikes. But whatever happens, I think this benefit (on NIMs) is available for 2-3 quarters,” Setty said.

The outlook comes against a tightening bias highlighted by SBI Research. The research arm expects the repo rate to reach 6% by December 2026, with another 50 basis points of cumulative hikes if inflation accelerates as projected.

SBI Research expects CPI inflation to rise to around 6.8% in November, while the RBI has raised its FY27 inflation forecast to 5.2% and projected Q3 inflation at 6%.

At the same time, the RBI has raised its FY27 GDP growth forecast to 7.1%, supported by resilient services activity, capacity utilisation and credit growth.

Setty said SBI expects to sustain 14-15% credit growth, arguing that loan growth of 2-3 percentage points above nominal GDP would help maintain the momentum of economic expansion.

For depositors, however, Setty acknowledged that banks need to provide some level of positive real interest rate as inflation rises, highlighting the potential tension between protecting bank margins and maintaining the attractiveness of deposits.