By Mahesh Nayak
The country’s largest bank and non-banking financial company – the State Bank of India and Bajaj Finance – have already given the signal that the rate cut cycle has begun. With SBI cutting rates by 20 basis points (bps) across tenures on Friday, it has now cut rates by 45 bps in the span of one month. Bajaj Finance also cut rates on Monday by 50 bps across some tenures.
“This is the direct outcome of RBI’s April policy stance of being accommodative from neutral. The focus of the RBI is on economic growth and wants credit offtake to surge,” said a CEO of a private sector on condition of anonymity. SBI is considered to be the barometer for the banking industry
He believes it is matter of time that HDFC Bank, ICICI Bank and other commercial banks will follow a rate cut. The former has already cut its savings deposit rate.
While the banker feels that lower deposit rates will give better credit accessibility to loans buyers especially home buyers and small businesses, a second private sector banker didn’t shy away to says, “Banks have little choice but to cut deposit rates to protect their NIMs (net interest margins).”
The regulator has been stressing the importance of linking assets (loans) to the External Benchmark Lending Rate (EBLR). This means that when the RBI cuts interest rates, banks are expected to pass on the benefits to borrowers by reducing loan rates.
Said another senior banker, “As asset prices decrease, banks cannot maintain fixed liability (deposit) rates for an extended period without eroding their NIMs, therefore maintaining a balance between their assets and liabilities will see banks cutting rates. This linkage ensures that the benefits of rate cuts are transmitted to borrowers, while banks adjust their liability rates to sustain their profitability.”
“It doesn’t come as a surprise. The days of peak NIMs are behind us. Banks have been and will continue to cut rates,” said Asutosh Mishra, Head of Research at Ashika Stock Broking. He believes, “With interest rates declining, banks will need to swiftly cut deposit rates to safeguard their profitability.”
In a rising interest rate environment, banks had seen a sharp expansion of NIMs as they quickly raised lending rates but were slower to increase deposit rates. However, with the tide changing and interest rates declining, there is a trend reversal. With no choice but to quickly pass on the interest rate cut benefits to borrowers, banks are also cutting savings rates.
The market was surprised when HDFC Bank cut its savings bank rate by 25 bps in April, as banks typically cut FD rates rather than savings bank rates. This was the first time since 2022 that HDFC Bank had cut its savings bank rate.
Despite the cut, HDFC Bank still offers higher interest rates for its savings bank accounts compared to peers like SBI and PNB. After the cut, HDFC Bank now offers 2.75% interest on savings bank accounts with balances below Rs 50 lakh and 3.25% for balances above Rs 50 lakh. In contrast, SBI and PNB pay 2.7% interest on savings bank account balances below Rs 10 crore.
Mishra added, “Cutting savings bank rates is the fastest way to transmit rate cuts. Banks save more and quickly, unlike FD rates, where repricing typically takes 6-12 months.” The interest on savings accounts is calculated using the daily closing balance, and the accumulated interest is credited to the account on a monthly or quarterly basis.
Favourable system liquidity has also contributed to banks cutting deposit rates. Surplus liquidity in the system has enabled banks to tap the market for raising money rather than relying on customer deposits. According to the latest monetary policy, system liquidity stood at Rs 1.5 lakh crore in surplus as of April 7, 2025.
With the 10-year G-Sec yield hovering around 6.25-6.30%, banks prefer to borrow from the market rather than paying an average of 7% on one-year FDs. The street expects10-year G-Sec yields to slip below 6%.
The pressure on NIMs is evident, with private sector banks witnessing a 51 bps drop in NIM to 3.93% in FY2025, while public sector banks saw a marginal fall of 4 bps to 3.14%. With expectations of a 75 bps cut in the repo rate this year, banks are likely to continue cutting deposit rates.
Mishra expects NIMs to remain under pressure, saying, “I don’t see NIM reversal until the December quarter.” However, banks will need to balance rate cuts with maintaining customer flows and healthy profitability, particularly given the decline in CASA ratios. For FY25, CASA continued to decline with PSU banks reported CASA at 40%, while CASA for private sector bank stood at 35.5%.
Vishal Goenka, Co-founder of Indiabonds, noted, “Savers are feeling the squeeze of plummeting interest rates, prompting them to explore alternative investment avenues that can help their savings flourish.” Banks will indeed need to walk a tightrope, balancing the need to protect customer flows with maintaining healthy profitability.