Deposit interest rate cuts likely to be moderate in current cycle

Elevated credit-deposit ratio, LCR norms may weigh on banks' decision

The cut in deposit interest rates during the current easing cycle is expected to be moderate compared to the previous one because the highest cut in the policy repo rate is anticipated to be about 100 basis points (bps), as against 250 bps in the previous cycle. 

In addition, the credit-deposit (CD) ratio will remain elevated for major banks. Also, regulatory factors, such as the revised liquidity coverage ratio (LCR) norms and the potential increase in deposit insurance coverage, will weigh on lenders, thus limiting their ability to implement significant deposit rate cuts. 

The monetary policy committee of the Reserve Bank of India (RBI), in its February  meeting, reduced the repo rate by 25 

basis points. 

In April, it reduced the policy repo rate by another 25 bps to 6 per cent. 

The committee also changed the policy stance to “accommodative”, signalling the likelihood of further easing in the coming months. 

Amid global uncertainties stemming from American tariff policies, economists are anticipating a deeper rate-cut cycle in the current easing phase, ranging between 75 and 100 bps. 

In the previous easing phase, from February 2019 to March 2022, the RBI reduced the policy repo rate by 250 bps. Consequent to a 250 basis point cut in the repo rate, the weighted average domestic term deposit rate (WADTDR) on fresh retail deposits had declined by 209 bps while on fresh retail and bulk deposits it went down by 259 bps. 

However, the transmission of 250 bps on outstanding deposits was 188 bps, according to the RBI’s Monetary Policy Report. 

Anil Gupta, group head (financial sector ratings), Icra, said while the easing rate cycle had begun, banks might take time to pass on the deposit side. The extent of the deposit rate cut is likely to be limited compared to the previous easing cycle. At present, the CD ratios of banks are still high.  

The aggregate CD ratio remains above 80 per cent. This can be attributed to the base effect of the merger as well as high growth in previous years.  

 

The LCR norms, which the RBI has postponed by at least a year, along with a possible increase in deposit-insurance cover, are expected to weigh on banks, leaving them limited room for significant deposit rate cuts, a senior bank executive said. 

Two public-sector bank executives said funds from middle-aged and the senior citizens had a substantial share in retail term deposits. Maintaining stability in the resource profile is important in the coming quarters, given the demand for money and competition.  

This limits the scope for any aggressive deposit rate cuts. 

Following the 50 basis-point rate cut in the current easing cycle, banks have been slow to pass on the revised rates to consumers, both for loans and deposits, largely due to a prolonged liquidity deficit. 

But some major banks have started the transmission. State Bank of India (SBI), the country’s largest lender, has reduced interest rates on term deposits of below ₹3 crore by 10 bps for select tenures, effective April 15. 

Additionally, the bank has revised the interest rate on its special deposit scheme, Amrit Vrishti, and withdrawn another special deposit scheme. 

Separately, HDFC Bank, the country’s largest private lender, has reduced interest rates on savings accounts by 25 bps. Earlier, the bank had reduced deposit rates by 35 bps on fixed deposits (FDs) for 35 months and by 40 basis points on FDs for 55 months. 

Yes Bank has lowered FD rates on select tenures by 25 bps. 

Bank of India (BoI), which is state-run, has reduced interest rates on term deposits in select tenures by 25 bps. 

Notwithstanding the revision in interest on term deposits, owing to expectations of further cuts in the policy rate in the near term, this class of liabilities will continue to attract customers because they anticipate that banks will go slow on cutting rates on FDs amid pressure of deposit mobilisation. 

“Banks are giving higher interest rates on short-term fixed deposits than on longer-term. Customers, especially senior citizens, are inclined towards term deposits ranging between one and three years. As customers are seeing that long-term rates will come down, now is the right time to lock in and hence the preference,” said a senior banking official with a state-owned bank. 

In a rate-cut cycle, customers block their money in term deposits.  

“There will be a bit of migration from savings accounts to term deposits because customers will try to get higher returns. Whenever there is a rate-cut cycle, customers automatically move towards term deposits,” said Madan Sabnavis, chief economist, Bank of Baroda.  With inputs from Subrata Panda