As Interest Rates Fall, Borrowers’ Gain Is Depositors’ Pain

Large banks have already started to cut rates in response to the RBI’s policy rate reduction. State Bank of India cut rates across its retail term deposits by 20-50 basis points. Bulk deposits, or deposits above Rs 2 crore, saw steeper cuts in interest rates by 50-100 basis points.

Following the reduction, India’s largest lender offered a maximum of 5.50 percent on retail term deposits up to one year. For the one-two year category, rates stand at 6.2 percent. Comparative data across this category, which has been consistently offered over the past decade, showed that rates are at the lowest over a 10-year period.

Other lenders have also slashed deposit rates.

• Bank of Baroda offers between 4.25 percent and 5.5 percent across different maturities up to one year. For deposits of one year, it offers 5.9 percent. The interest rate you earn is marginally higher a 6 percent, if you park your deposits for up to 400 days.
• Bank of India also offers between 4.25 percent and 5.5 percent across different categories till one year. It offers 6.1 percent in the one-two year bucket.
• Among private lenders, HDFC Bank offers 6.15 percent for deposits between one and two years.
• ICICI Bank offers between 4 percent and 6 percent for deposits up to one year and between 6-6.30 percent for deposits parked for one-two years.

Not all banks have reduced rates in response to the RBI’s recent policy rate reduction but will likely do so in the coming weeks.

Ashutosh Khajuria, executive director and CFO at Federal bank, said that the quantum of deposit rate cuts would vary from one bank to another depending on the deposits the bank has been able to mobilise and its credit offtake. Most banks are likely to take a call on this in the first week of April when when their asset-liability management committees meet, he said.

Inflation-Adjusted Returns

At a systemic level, deposit rates have been on a decline since almost 2012, barring a brief period of an increase in deposit rates in 2019. Moreover, real interest rates, which are calculated by deducting the inflation rate from the interest earned, has turned negative.

This essentially suggests that depositors earn little or nothing in inflation adjusted terms by putting their money with banks. This may change if inflation falls faster than interest rates in the coming months.

The trend of moderating interest rates on deposits is likely to continue to play out over the next few months, said Sameer Narang, chief economist at Bank of Baroda. Even before the outbreak of coronavirus, the rate of growth of deposits was higher than the rate of growth of credit, he said, adding that this is not expected to change. However, the pace of decline of interest rates on deposits is likely to remain gradual, unlike repo rate cuts, he said.

Fixed deposit interest rates are quite low and further moderation in deposit rates is a matter of worry, said financial planner Pankaj Mathpal, managing director at Optima money managers. Mathpal said this decline might prompt retail depositors to rebalance their portfolio and look beyond conventional financial savings instruments. Even as depositors can’t ignore benefits like capital preservation and guaranteed returns, current interest rates and inflation levels are unlikely to help them achieve financial goals, Mathpal said.