The country’s second-largest private-sector lender, HDFC Bank, has reduced the interest rate on one-year fixed deposits by 25 basis points (bps) to 7%, lower than the 7.05% offered by the State Bank of India (SBI) on deposits of the same tenure. SBI had effected a 10-basis point cut on its one-year deposits, effective October 24, to push the rate down to a six-year low.
HDFC Bank has also slashed rates on its two-year and three-year fixed deposits by 25 bps each to 7%. SBI pays interest at the rate of 7% and 6.5% on its two- and three-year deposits, respectively. The bank’s private-sector peers ICICI 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. This means that while borrowers can avail of cheaper loans, fixed deposits will turn progressively unattractive for savers.
With the latest cut in deposit rates by HDFC Bank, the real interest rate stands at 0.59%, considering a tax rate of 30% and the September consumer price index (CPI)-based inflation reading of 4.31%. This marks a drop from the 0.765% that savers stood to earn till Sunday, when one-year deposits with the private-sector lender fetched an interest of 7.25%.
In an environment of falling interest rates, HDFC Bank has found it easier to manage its liquidity needs through the bond market rather than pushing term deposits. After the bank detailed its results for the July-September quarter, deputy managing director Paresh Sukthankar told journalists, “We’ve raised those bonds which you can raise against your infrastructure and housing loan portfolios as well as the fact that we’ve been comfortable from a liquidity perspective. So the deposit growth has been more than adequate to fund what growth in our balance sheet has been,” Sukthankar added that among deposits, the bank would focus on CASA (current account savings account) growth in the days ahead.