Why has State Bank of India(SBI) cut deposit rates when banks in general aren’t able to gather deposits fast enough? The industry’s deposit growth rate from a year ago stands at 14.3%. Credit growth, while slovenly, is faster at 16.6%.

The rate cut from SBI seems to be predicated on the bank’s belief that the easy liquidity situation will continue. Banks’ borrowings under the Reserve Bank of India’s (RBI’s) repo window have halved in the past few months. Certificate of deposit rates, too, have reduced. Moreover, SBI’s chairman has been confidently predicting a 1% cut in the cash reserve ratio (CRR). That would free up 10,000 crore worth of deposits for SBI to lend and will help restrain any adverse impact from the cut in deposit rates.

To be sure, SBI has done well to garner deposits so far. It is better positioned than most other local banks. For the quarter ended June, deposits for the bank grew at 16.09%, way better than the sector’s 13.4% growth. Low-cost current and savings account deposits make up as much as 47% of its total, thus giving it some flexibility to slash term deposit rates. Indeed, its management has indicated that it has surplus deposits.

Secondly, credit growth has not been all that hot. The incremental credit-deposit ratio (six-monthly change) has come down to 71.32% from 138% in March, a function of slower credit growth. The latest sectoral use of credit data from the central bank also shows that growth in advances to industry didn’t grow at all this during this fiscal year.

However, this scenario of slow credit growth and easy liquidity is not likely to last long. Advance tax outflows worth some 60,000 crore and RBI’s forward dollar sales worth $14 billion ( 78,400 crore today) that will come up for redemption will create further strains on the liquidity situation. The usual spike in credit offtake in the second half of the year, even in bad years, will add to this. So, a 1% CRR cut and RBI’s open market bond purchases will, at best, balance this rupee drain.

Therefore, the economic fundamentals simply don’t justify further deposit rate cuts from most other banks. Even if they follow SBI now, they may be forced to reverse these cuts when lending picks up. In all likelihood, this deposit rate cut from SBI may be a one-off.

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Also See

Sectoral status (PDF)

Intraday & quarterly performance (PDF)

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