Sneha Srivastava/Mint
Sneha Srivastava/Mint

DYK: Why banks cut fixed deposit rates

Banks have been reducing rates in certain deposit baskets. You can expect more banks to follow suit

Major banks have recently cut interest rates on fixed deposits (FDs) in select maturity baskets. Some of these are now offering rates lower than post office time deposits and National Savings Certificate (NSC).

WHAT’S ON OFFER?

This month, State Bank of India (SBI), the country’s largest bank, cut interest rate for FDs below 1 crore to 8.5% from 8.75% for a maturity of one to five years. The interest rate on FDs with maturities of five years and above has been cut to 8.25% from 8.5%.

The country’s largest private bank, ICICI Bank Ltd, has reduced its FD rate from 9% to 8.75% in the 390-days to two-year maturity basket. HDFC Bank Ltd, too, has reduced interest rates by 25-50 basis points (bps) in the 46-days and below one-year maturity baskets. One basis point is one-hundredth of a percentage point.

In October this year, SBI had reduced the interest rate on short-term deposits by 100 bps to 5% from 6% earlier. Similarly, Oriental Bank of Commerce and Punjab National Bank, too, had reduced interest rates on deposits by 25-50 bps.

WHY THE CUT?

The decision to increase or decrease FD interest rates depends on various factors such as liquidity and demand and supply conditions. When there is no offtake in credit growth, banks reduce deposit rates. On the other hand, when demand for credit is high, banks increase rates on FDs as they need more money to lend. At present, the demand for credit is poor, hence banks are reducing rates.

Also, there is an anticipation of lending rate cut in the near future. Analysts say the current cut in deposit rates is in anticipation of a lending rate reduction, which will see some improvement in margins of banks and give them some buffer before they cut lending rates.

Liquidity is another key reason for the fall in deposit rates. Liquidity basically refers to availability of cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. When there is enough liquidity in the system, banks don’t have to depend on retail term deposits for money. When liquidity is tight, banks sometimes depend on their own bank deposits to fulfil their needs.

A sharp dip in call rates is a sign that there is liquidity available in the market. Call rate is the inter-bank interest rate on funds. Banks borrow from the call market for their short-term needs. At present, the call market is lending at a lower rate, which, in turn, affects interest rates on retail deposits. The call market rates, hence, have an effect on interest rate on FDs.

WHAT SHOULD YOU DO

Banks have been reducing rates in certain deposit baskets. You can expect more banks to follow suit. If you were looking to invest in FDs for a period of more than five years, then make sure you compare the rates offered with the rates of post office time deposits and NSC before you invest. Though there are corporate FDs with more attractive rates than bank FDs, the associated risk has to be researched thoroughly.

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