Deposit rate cuts start trickling in at lenders

In the first clear signal that interest rates are on the way down, banks and non-banking finance companies (NBFCs) have begun pruning deposit rates. The Reserve Bank of India is expected to announce another policy rate cut next week, while a further improvement in liquidity conditions is also seen.

HDFC Bank, Yes Bank and Bandhan Bank, as well as NBFC Bajaj Finance, have all reduced deposit rates this week. This would eventually lead to lower lending rates and improve transmission of policy rates, treasury officials said.

RBI has purchased bonds worth ₹1.4 lakh crore since January to improve liquidity in the financial system. On Tuesday, it announced buyback of another ₹80,000 crore.

In February, the central bank cut the repo rate for the first time in five years, by a quarter percentage point. The Monetary Policy Committee will announce its bi-monthly rate decision on April 9, when it is widely expected to cut the rate by another quarter percentage point.

Most banks are expected to start lowering deposit rates this quarter. They have reduced those based on the external benchmark lending rate (EBLR), which is linked to the repo rate. However, they are unlikely to immediately lower the lending rate based on their marginal cost of funds (MCLR), bankers said. A cut in deposit rates paves the way for a fall in MCLR.

HDFC Bank, Yes Bank and Bajaj Finance have cut deposit rates by 0.25-0.40 percentage point, while Bandhan Bank has slashed rates on savings accounts by as much as half.

Less Interest on Special Deposits

Significantly, banks are cutting rates at a time when the government has kept the small savings rate unchanged for April-June for all schemes it sells, including on Government of India savings bonds that are popularly known as RBI bonds.

The maximum these offer is 8.2% on RBI bonds and senior citizen's savings schemes.

"Fixed deposit investors should take advantage of this opportunity and lock into these high rates, opting for longer tenures of four to five years," said Anup Bhaiya, managing director and chief executive of Money Honey Financial Services.

The cut is especially focused on special deposits that had been rolled out for a limited period (till March 31) at higher rates in a bid to mobilise resources amid intense competition to gather liabilities. HDFC Bank ended its special deposit scheme, under which it offered 7.35% for 35-month retail deposits and 7.40% on 55-month deposits. It is now offering 7% on these two tenures.

Yes Bank has lowered fixed deposit rates by 0.25 percentage point on select tenures.

Bajaj Finance has also announced a quarter percentage point rate reduction on its longer tenure fixed deposits. From April 10, it will offer 8.15% on a 42-month fixed deposit.

Bandhan Bank has cut the savings deposit rate. It is now offering 3-5% depending on the balances between ₹1 lakh and ₹10 lakh.

Earlier, interest on the savings account balance for similar buckets was flat at 6% a year.

From an average deficit of ₹1.3 lakh crore in March, the systemic liquidity has now moved to a surplus. The central bank's infusion, including through purchase of government bonds under its open market operations, has helped improve liquidity conditions.

Traditionally, the first quarter of a fiscal year is relatively slow for credit growth, and this would also give banks room to reduce deposit rate as they will not be scrambling for deposits, said Ritesh Bhusari, joint general manager at South Indian Bank.

Distributors point out that the spread between government bonds and fixed deposits is lucrative, at 150-165 basis points (1.5-1.65 percentage point), making a case for locking into these rates. While the benchmark 10-year government bond yields 6.5%, an AAA-rated Bajaj Finance FD currently yields 8.4%, thereby giving investors a spread of 190 basis points.

"Due to high liquidity in the system, rate transmission is bound to happen, which will lead to lower rates," said Vijay Kuppa, chief executive at Incred Money. Kuppa believes it is a matter of time before other NBFCs announce a similar reduction in deposit rates.

Financial planners point out that FDs score as they are easy to understand and give regular cash flows that are not dependent on market conditions.

These products find favour with retirees or investors looking to meet goals and keep things simple without any uncertainty.In comparison, returns on debt funds are not fixed and they could be volatile based on the fund chosen and in times of high-interest rate fluctuations there could be mark to market gains or losses.