Deepest RBI cut in five years will take deposit rates lower
The RBI's deeper than expected 50 basis points rate cut on Friday will hasten a fall in deposit rates as banks will readjust their liabilities to the current rate regime. Banks have already started reducing their deposits rates with some bans pre-empting Friday's cut with an immediate reduction in rates.
Governor Sanjay Malhotra said deposit rates have been reduced on retail as well as wholesale by most banks by 40 basis points since the RBI cut its repo rate in February. 'The average reduction in deposit rates is 27 basis points. But there is a lag. On the asset side 45% of the loan book is linked on the external benchmarks which gets immediately transferred. But on the deposit side there is no such mechanism so there is a lag. Despite all this 27 basis points is already transferred on the deposit side,' Malhotra said. One basis point is 0.01 percentage point.
In February and April RBI reduced the repo rate by 25 basis points each. The 50 basis point cut on Friday means that the benchmark rate has now been reduced by a cumulative 100 basis points this calendar year. Malhotra said ultimately the rate cuts will have an impact. But just like in the past two cycles the impact will happen with a lag of six to nine months.Banks have already started to reduce rates in anticipation of the widely expected rate cut. Private sector banks ICICI and Axis both reduced their deposit rates effective June 6. ICICI for example reduced some bulk deposit rates. The bank had already cut its rate for retail deposits with a tenure of 18 months to 2 years by 20 basis points on May 17.
Other large lenders State Bank of India, HDFC Bank, Punjab National Bank and Bank of Baroda had already reduced rates in mid to late May, in anticipation of the RBI cut, their websites show.
'For transmission to happen both sides of the balance sheet have to be adjusted. The quantum of the cuts will be decided when our asset liability committee meets but its fair to assume that rates are on the way down,' said Saloni Narayan, DMD, finance, SBI.The sharp rate cut in the Covid years of 2020-21 had reduced bank deposit rates. Bankers said though it cannot be predicted how low rates will go this time, it is right to say that depositors will have to live with lower rates.'With repo at 5.5% and ample liquidity in the system, it is fair to assume overnight rates at 5.25% which means one year deposit rates cannot go above 6% it 6.25%. With the amount of money in the system, the cost of funds is likely to fall and customers will have to get used to a lower returns,' said Rajiv Anand, DMD, Axis Bank.
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