In an expected move, last week the government reduced the interest rate on small savings schemes such as public provident fund (PPF), post office time deposits, Kisan Vikas Patra, National Savings Certificate (NSC) and Sukanya Samriddhi Scheme. The reduction in rate is by 10 basis points (bps). One bps is one-hundredth of a percentage point. With the cut in interest rate in small savings scheme, you can now expect the interest rate on your fixed deposits to fall.
Though the Reserve Bank of India (RBI) has cut the key rate thrice, banks have not passed on the rate cut to loan rates. The banks have been blaming the inability to cut rates on tight liquidity situation and also on high-interest rate on small savings rate.
Sameer Narang, chief economist at Bank of Baroda, said, “The banks were going to the RBI to borrow, as there was a difference in deposit and credit growth rate. Now the liquidity in the banking sector has turned positive. RBI has been infusing liquidity through repo transactions and the term repo window."
“Typically, surplus liquidity conditions are conducive for lower rates in the bond market and transmission can happen in other parts of the market. One of the reasons was that small savings rate was higher. Now that it has been brought down by 10 bps, some decline in deposit rates is also possible," Narang added.
Usually, there is a lag in terms of revision in deposit and lending rate after the key policy rate cut. “Now if you see, there is a four to six months’ lag. So you will see the impact of previous rate reduction on lending rate as we move forward," said Narang.
Experts say that transmission is a structural issue and that the cut in deposit rate will be a gradual process. “It will be a gradual process. Structurally the cut in small savings rate allows banks to be more flexible. The issue is the lending rate in terms of transmission and not so much about the deposit rates. Lending rates have come down incrementally on fresh loans but not on existing loans. Transmission needs to be faster and deeper. This has always been the problem. But I do see transmission improving," Dharmakirti Joshi, chief economist at Crisil.
HOW WILL IT IMPACT YOU?
Considering that we are in the falling interest rate cycle, there is an expectation of rate cut on your loans. Now that small savings rate has also been cut, you are likely to see a cut in bank deposit rates as well.
If you are looking to deposit your money in a bank, you may want to lock-in your money now as the fixed deposit rate may come down gradually if not immediately. While opting for a fixed deposit product, don’t only look at the FD rates of your bank where you have savings account. You should compare FD rates of different banks and then invest.