The interest rate on State Bank of India’s (SBI) one-year fixed deposits has dropped to a six-year low of 7.05% after the latest round of rate cuts effected by the country’s largest bank, which saw the rates on two-year and three-year deposits head to 7% and 6.5%, respectively. The last time SBI offered a lower rate on one-year deposits was between October 1 and December 7, 2010, when it stood at 7%.
SBI’s Delhi-based peer, Punjab National Bank (PNB), has slashed the rate on one-year deposits by 5 basis points (bps) to 7.2% and those on two-year and three-year deposits by 10 bps each to 7.05%. Bank of Baroda, while maintaining rates on one- and two-year deposits at 7.3%, has reduced the rate on three-year deposits by 5 bps to 7.25%. Large private-sector lenders ICICI Bank, HDFC Bank and Axis Bank continue to hold rates on one-, two- and three-year deposits at 7.25%.
Bringing down rates on deposits is imperative for banks in order to maintain their margins while transmitting the Reserve Bank of India’s rate cuts, amounting to 175 bps since January 2015, to borrowers. Last week, SBI reduced its marginal cost of funds-based lending rate (MCLR) by 15 bps to 8.9%, which has resulted in the floating rate on home loans up to R75 lakh dropping to 9.15%. The change, however, will be applicable only to new borrowers as SBI’s base rate remains unchanged at 9.3%.
While borrowers are set to get a better deal, cuts in term deposit rates make fixed deposits increasingly unattractive for savers. With the latest cut in deposit rates by SBI, the real interest rate stands at 0.625%, considering a tax rate of 30% and the September consumer price index (CPI)-based inflation reading of 4.31%. This marks a marginal fall from the 0.695% that savers stood to earn till Oct 23, when one-year deposits with SBI earned an interest of 7.15%.