RBI liquidity boost cuts wholesale funding costs, but banks remain locked in deposit battle

Improved liquidity conditions have eased short-term funding pressures for Indian banks, but lenders are unlikely to step away from the race for deposits as they continue to focus on building stable retail liabilities amid strong credit demand and pressure on profitability.

The Reserve Bank of India's liquidity measures have helped improve banking system liquidity and lowered short-term funding costs, including rates on instruments such as certificates of deposit (CDs). However, analysts said the improvement in system liquidity has not eliminated the need for banks to mobilise deposits, particularly retail deposits that provide a stable and low-cost funding base.

The continued competition for deposits reflects a structural challenge faced by banks over the past few years, with loan growth frequently outpacing deposit mobilisation. While liquidity operations have provided temporary relief, lenders continue to prioritise deposit accretion to support balance-sheet expansion and maintain regulatory liquidity buffers.

The issue is not only about liquidity availability but also about the quality and stability of liabilities. Retail deposits remain critical for banks because they provide predictable funding, according to experts.

Deposit rate lag

The changing interest rate environment has also added complexity for lenders. While lower short-term funding costs provide some relief, banks continue to face pressure on net interest margins (NIMs) as lending rates reprice faster than deposit costs following monetary easing.

With a large portion of floating-rate loans linked to external benchmarks, the benefits of lower policy rates are transmitted relatively quickly to borrowers. Deposit rates, particularly on retail fixed deposits, tend to adjust with a lag, creating near-term pressure on margins.

As a result, banks are expected to focus less on aggressive rate-led deposit mobilisation and more on improving the quality of their liability franchise through CASA growth, salary accounts, transaction banking, digital acquisition and wealth management relationships.

Large banks with stronger CASA ratios are likely to have an advantage as funding conditions normalise, while lenders more dependent on term deposits may continue to face higher liability costs.

For depositors, the current environment may not immediately translate into a sharp decline in fixed deposit rates. While short-term funding costs have softened, banks are likely to remain selective in pricing deposits as they balance liquidity conditions, credit growth and profitability targets.

The emerging trend suggests that surplus system liquidity may reduce the intensity of funding stress, but it is unlikely to end the competition for deposits as banks continue to seek durable and low-cost sources of funds.