In recent years, Indian banks have maintained relatively stable interest rates, but a significant shift has occurred as they now raise rates to levels not seen in the last two years. This change is primarily driven by a liquidity shortage and a growing credit-deposit imbalance, which have compelled banks to attract funds more aggressively.
As of February 2026, credit growth was recorded at 13.7%, while deposit growth lagged behind at 10.9%. This disparity has led to a loan-to-deposit ratio reaching a high of 82.5%, indicating that banks are lending more than they are collecting in deposits. In response, banks have turned to Certificates of Deposit (CDs) as a means of raising funds.
CSB Bank has taken the lead by offering an interest rate of 8.32% for 91-day CDs, while both Ujjivan Small Finance Bank and Equitas Small Finance Bank have set their rates at 8.25%. HDFC Bank and IDBI Bank are offering slightly lower rates of 7.6% for short-term funds. This competitive environment has resulted in a significant increase in investments in CDs, which have surged to ₹6.64 lakh crore, reflecting a remarkable growth of 75% over the last two years.
The difference between three-month CD rates and Treasury Bill rates has also widened, now standing at 210 basis points, the highest since March 2020. This indicates a growing demand for higher returns on deposits, as investors seek better yields amid fluctuating market conditions.
However, the rising interest rates come with potential downsides. Fitch Ratings has warned that if funding costs continue to rise, net interest margins (NIMs) could decrease by 20-30 basis points by FY27. This forecast raises concerns about the long-term profitability of banks as they navigate this challenging financial landscape.
Experts have noted that the current increase in interest rates has surpassed seasonal changes, indicating a more profound issue within the banking sector. The liquidity crunch is expected to persist until FY27, further complicating the situation for banks trying to balance their lending and deposit strategies.
In summary, the landscape of Indian banking is undergoing a significant transformation as banks respond to liquidity challenges by raising interest rates. This shift not only affects the banks themselves but also has broader implications for borrowers and investors alike.
