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Following a rate cut by the Reserve Bank of India (RBI) in the monetary policy review held on Tuesday few banks reduced their deposit rates and more banks are likely to do the same. RBI had cut the repo rate or the rate at which banks borrow from RBI by 25 basis points yesterday in the policy review.
Public sector lender Punjab National Bank reduced the interest rate on domestic term deposits in select maturity buckets by 25 basis points. The new rates will be effective from June 8 while largest private sector lender ICICI Bank and Axis bank have also reduced the rates on bulk deposit. While ICICI Bank has cut the bulk deposit rate (above Rs 1 crore) by 5-25 basis points, Axis Bank has cut bulk deposit rate (above Rs 5 crore) by 10-20 basis points.
On Tuesday, apart from reducing the base rate, the country's largest lender State Bank of India (SBI) also reduced the interest rate by 25-50 basis points on short term deposits.
However, the policy review has not been beneficial for the bond market due to the central bank's hawkish tone. Bond yields began rising after the policy review and the trend continued on Wednesday. On the other hand the depreciating bias for the rupee continued as foreign investors were seen selling their investments in domestic markets.
Vibha Batra, co-head financial sector rating, ICRA said it is very tough for banks to make substantial cut in interest rate on term deposits as alternate savings instruments carry higher rates. They (banks) would focus on changing big ticket deposits in line with call rates.
Banks have been reducing interest rate on term deposits since October last year. In the present round of rate reductions, the extent of cuts may not be in the same proportion as done in 2014-15. That is even before RBI begun to cut repo rate in January 2015. Since January this year the repo rate has been so far cut by 75 basis points and it stands at 7.25%.
Meanwhile, the yield on the new 10-year bond rose to end at 7.74% on Wednesday compared with previous close of 7.72%. The yield on the old 10-year bond ended at 7.95% compared with previous close of 7.93%. Yesterday after the RBI policy the yield on the new as well as the old 10-year bond had risen to end up by 8 and 11 basis points respectively.
| Banks | Tenure | Interest rate per annum (%) |
| SBI | 1 year-455 days | 8 |
| PNB | 1 year | 8.5 |
| ICICI Bank | 1 year-389 days | 8 |
| HDFC Bank | 1 year-13 months | 8.5 |
| Axis Bank | 1 year | 8.4 |
| Source: Banks | ||
“Global bond market yields also rose last night and tracking that today yields have risen. Yesterday too while the rate cut happened, the guidance was hawkish. Though macro conditions have supported a rate cut, the near term risks to inflation are on the upside due to rising crude, monsoon related concerns etc,” said R Sivakumar, head of fixed income at Axis Mutual Fund.
In fact since corporate bond yields too have remained high, according to issue arrangers companies did not go for raising funds through bonds as it would have turned expensive for them.
The rupee ended weak on Wednesday against the dollar at 63.91 compared with previous close of 63.83. During intra-day trades the rupee had even breached the 64 mark and touched a low of 64.07 per dollar.
“The weakness in the rupee was due to Foreign Institutional Investors (FII) puling out of domestic markets and some dollar demand by corporates. The central bank had intervened in the market today to arrest volatility in the rupee,” said Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai.
