Banks slash deposit rates taking cue from RBI’s repo cut

With both conditions now met, banks have taken the cue from the Reserve Bank of India's (RBI) repo rate cut of 25 basis points (bps) last week. While the liquidity surplus stood at ₹2.08 trillion on 10 April, non-food credit growth slowed to 10.9% year-on-year (y-o-y) as of March end, almost half of what it was a year earlier.

State Bank of India, Bank of India and Kotak Mahindra Bank have slashed interest rates on fixed deposits following the repo rate cut.

Slicing the savings pie

India’s largest lender SBI cut term deposit rates by 10 basis points (bps), while Bank of India has reduced rates by up to 25 bps. Some popular schemes such as SBI’s Amrit Kalash and Bank of India’s 400-Day Special Plan have been withdrawn. Kotak Mahindra Bank has reduced deposit rates by up to 15 basis points on select tenures.

Read more: Tight liquidity forced lenders to ramp up short-term borrowing in FY25

Meanwhile, HDFC Bank also reduced its savings deposit rate by 25 bps to 2.75%. This is among the lowest in the industry and brings the private lender close to SBI’s 2.7%.

“We had the first policy rate cut in February, so it will take, maybe, another 3-4 weeks for the cuts to fully play out. Banks would also like to do it one step at a time, not the entire cut together, because they also need to factor in saver behaviour and flow of deposits, so the adjustment will happen slowly," said a banker with a private sector bank. “[Of] the entire 50 bps rate cut that has happened so far, a large part of the balance sheet will be pre-pricing it on the asset side, so eventually it has to be passed on to the liability side as well,"

The banker said the current account-savings account or the Casa ratio in the banking system has come down, which means that just by changing the savings account rates, banks can’t have the complete transmission to the liability side, and it won’t impact the overall deposit rates. “In some sense, bulk deposit rates and CD (certificates of deposit) rates have already come down by 50-60 bps."

According to Madan Sabnavis, chief economist at Bank of Baroda, typically 40-50% of the rate cut is transmitted to deposit rates. However, the rate of transmission will vary across banks, he said.

“Private sector banks, which have 80% of their loans linked to external benchmark lending rate (EBLR), will reduce their deposit rates as credit demand has slowed down. Lowering the savings bank rate helps to manage the cost of funds when the overall size of deposits is high," Sabnavis said.

RBI's repo rate cut of 25 bps in February 2025 did not translate into a wider cut in fixed deposit rates. Public sector banks reduced deposit rates by 6 bps, while their private peers increased the rate by 2 bps, according to a report by SBI research.

Higher market borrowing costs prohibited banks from risking lower deposit rates. According to RBI data, the weighted average domestic term deposit rate on outstanding deposits touched a nine-year high of 7.02% in February. Tight liquidity conditions and strong credit growth in the fourth quarter discouraged banks from passing the rate cut to depositors.

Read more: Banks have had a rough ride, but some bucked the trend

As liquidity in the system improved with RBI’s consistent efforts through open market operations and other tools, banks found greater flexibility to cut deposit rates. Since January this year, the central bank has infused liquidity worth ₹7 trillion into the system. Banks were sourcing funds through certificates of deposits at a higher cost of over 8% but have seen it dip by 100 bps by the end of March.

Still, banks’ margins are likely to be under pressure in the first quarter. According to Emkay Research, consecutive and swift rate cuts could accelerate pressure on margins for banks with a higher share of floating rate (EBLR) loans, as deposit repricing could happen with a lag.

“We believe that the cumulative impact of a 50 bps repo rate cut, partly offset by a CRR (cash reserve ratio) cut, could be 7-20bps on margins, without factoring in any immediate deposit rate cut," said analysts at Emkay research in a 10 April report.

According to SBI Ecowrap, a research report by SBI, the savings deposit share holds around 30% of total deposits and remains sticky in interest rate. “So, the overall transmission to deposit rates remained low as savings deposit rates remained unresponsive to policy rate changes," it said in a report on 9 April.

In addition, the decline in the share of current and savings accounts (Casa) in total deposits, along with the higher transmission to term deposit rates in relation to lending rates, have exerted downward pressure on banks' net interest margins.

Others said customers could now lock in deposits at higher rates before they start going down on long-term deposits. Anil Gupta, senior vice-president and co-group head of financial sector ratings at Icra Ltd, said the industry could possibly see a little more downtrend in the share of savings deposits in total deposits but should remain around the 35-36% range.

“Unless credit growth slows down and hence the requirement to mobilise deposits at a high rate from the retail segment goes down, we don’t foresee any significant cuts in the immediate term," said Gupta.

Three to five large banks command 40-50% of the deposit market share, and if there is a steep cut on deposit rates by any particular bank, then that lender can lose out on not just deposits but also the ability to grow credit, Gupta said. “So, it’s not going to be an easy task given the current liquidity environment, unless banks collectively decide to do so."

Read more: More than a rate cut: RBI’s decision reinforces its dual mandate