Share of high cost deposits double in two years

The share of term deposits earning 7% and above has more than doubled to 72.94% in March, latest central bank data showed. Rates climbed as banks competed for funds amid a cumulative 225 225 basis point increase in the previous cycle of rate hardening, which sought to restrain inflation spawned by the Covid-era policy easing.

One basis point is a hundredth of a percentage point.

Experts said the trend also marks a shift away from retail to bulk deposits, and despite the start to an easing cycle, deposits would continue to be costly through FY26, potentially crimping margin expansion at mainstream lenders.

“Besides the transmission of rate hikes in the cost of deposits continuing until FY25, the share of pricier bulk deposits had also been rising for the last few years,” said Sachin Sachdeva, vice president, sector head – financial sector ratings, Icra.

The flow of funds from retail investors to capital markets (debt or equity) led to a change in the composition of deposits (from retail to wholesale).

“Consequently, the banking sector witnessed persisting high cost of deposits in FY25,” explained Sachdeva.The number of demat accounts and mutual fund contributions have continued to hit successive records since the pandemic, indicating both financialization of savings and an evident deepening of the equity culture that intensified competition for deposits.With high-cost deposits accounting for close to three fourth of the deposits mobilised by the commercial banks, there could be pressure on the interest income margins even in FY26, as the impact of the recent 50 bps rate easing would impact the deposit costs only with a lag.

“As for the outlook for FY26, even though the rate cycle has reversed…, the transmission of these (cuts) into reduced cost of deposit would happen with a lag unlike in the case of transmission in lending rates, which happens faster, given high share of external benchmark linked loans” said Sachadeva “Hence, interest margins for banks are likely to compress by around 10 bps in FY26.”

Even the central bank’s latest Financial Stability Report acknowledges the shift toward high-cost deposits.

“Against the backdrop of the recent monetary policy tightening cycle in India, bank deposits continue to exhibit double digit growth, but their profile has gradually shifted toward schemes offering higher returns,” said the report.