Most banks did not change their deposit rates after the Reserve Bank of India reduced the repo rate by 25 basis points (bps) in February. Consequently, lending rates for corporate customers remained largely unchanged. Banks also worried that lower rates may drive out deposits in a quarter where loan demand usually peaks.
Bankers said that another rate cut in April—which looks likely after the 3.6% inflation print for February—would necessitate deposit rate cuts, the only way to pass on the lower costs to more borrowers.
“The rate of interest in term deposits will remain elevated in this quarter (Q4 FY25), but definitely from 1 April onwards, the interest rates on deposits should be coming down in line with the fall in repo rate,” said Rajneesh Karnatak, chief executive, Bank of India. “Once that starts happening and the rate of interest on the deposits starts coming down, there will be some improvements in net interest margins (NIMs),” Karnatak said in an interview earlier this month.
The central bank’s monetary policy committee meets from 7 to 9 April.
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Lenders are banking on deposit rate cuts to protect margins that shrink while lending rates fall, especially on loans linked to benchmarks like the repo. That said, cutting deposit rates would take time to show up in margins, because unlike loans, any rate revisions apply only to fresh deposits, while the bank must pay unchanged rates on existing loans till they mature.
The head of another large public sector bank said that if there is another rate cut in April, banks will have to lower deposit rates. Barring a few, banks have not revised their deposit rates in a while. India’s largest lender State Bank of India (SBI) last revised deposit rates in June 2024, raising rates by 25 basis points (bps) for a couple of tenors.
“In my assessment, the imperative to lower deposit rates on account of the 25 bps rate cut in February is not very high. However, if there were to be more policy rate cuts, then banks would likely respond in measure by lowering deposit rates,” said Saswata Guha, senior director, financial institutions (banks), Fitch Ratings.
Banks paid an average of 6.56% on fresh term deposits in January, showed latest data on weighted average deposit rates released by RBI. In January 2024, it stood at 6.43% and at 6.22% in January 2023.
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Others pointed to the liquidity scenario which has remained in deficit since mid-December. Bloomberg data showed liquidity deficit at ₹1.7 trillion on 24 March, against ₹2.5 trillion the previous day.
“Liquidity has been a challenge, but RBI has taken lots of steps to ease it. Despite that, though liquidity is currently fairly negative, there are indications that things will get better next fiscal,” said Pralay Mondal, chief executive, CSB Bank.
Mondal said that nobody expected deposit rates to come down in March because it is a busy season for banks, but for rates to come down in April, liquidity has to turn positive again. At the end of the day, deposit rate cuts are required to lower lending rates and allow better transmission of RBI’s rate cuts. “For credit growth to pick up – be it retail, SME or corporate — banks need deposits, and therefore, rates will remain competitive.”
Mint reported in February that the policy rate cut by RBI should turn out to be good news for individuals and small businesses but large corporates will have to wait longer for any relief on borrowing costs. Banks give out loans to industry based on a benchmark called marginal cost of funds or MCLR, which is an internal metric that is linked to their deposit rates.
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As of September 2024, 37% of all floating rate loans were linked to MCLR, according to RBI data. For corporates, interest rates on loans can go down only once MCLR changes which, in turn, can only happen after banks reduce deposit rates.
“There is stiff competition among banks for deposits even now. The competition for deposits will remain high and players will be watching each other keenly,” said Anil Gupta, senior vice-president, co group head – financial sector ratings, Icra Ltd. “Deposit rate cuts, if they were to happen, will initially be restricted to shorter tenor rates or on deposits of less than six months. The rate on longer term deposits may not decline to an extent of the cut in repo rate,” Gupta added.
Guha said that the smaller and mid-sized banks whose funding costs are higher than the larger banks may look to lower rates earlier, but that does not necessarily move the needle for the bigger banks. The larger lenders would have to manage their credit-deposit ratios in order to reduce the pressure on funding costs, he said.
“If they are able to do that in a sustained manner, it would create room for lowering deposit rates more affirmatively in the current scenario, and also in the event of policy rate cuts in the future,” said Guha.
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Other experts said that deposit rate cuts will depend on which bank takes the plunge first. They said that lenders will be watchful before cutting deposit rates because credit-deposit ratios are still quite high. The CD ratio indicates how much of a bank’s deposit base is being utilized for loans.
https://www.livemint.com/economy/stage-set-for-deposit-rate-cuts-from-april-11742901025290.html
