RBI fires 40 basis points rate cut salvo at standstill economy, depositors stare at lower returns

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May 23, 2020 2:00 AM

While the rate cut will help lower finance costs for borrowers hit by the pandemic, depositors will continue to bear the brunt of lower returns.

The Reserve Bank of India fired yet another rate cut salvo at a standstill economy by cutting repo rate by 40 basis points to 4%.The Reserve Bank of India fired yet another rate cut salvo at a standstill economy by cutting repo rate by 40 basis points to 4%.

The Reserve Bank of India fired yet another rate cut salvo at a standstill economy by cutting repo rate by 40 basis points to 4%. While the rate cut will help lower finance costs for borrowers hit by the pandemic, depositors will continue to bear the brunt of lower returns. Bankers hinted that deposit rates would fall further as they move to protect margins while offering cheaper loans. Within hours of RBI cutting the benchmark rate, HDFC Bank cut its base rate by 55 bps.

Banks are also loath to pay out higher interest on deposits at a time when their interest inflows have come under pressure because of the loan moratorium. Instead, they are preferring to park money with the RBI under the reverse repo window and these funds can offer liquidity for deposit payments.

Rajnish Kumar, chairman, State Bank of India (SBI), said that the bank would take a call on interest rates in June. “We will discuss these issues at our ALCO (asset liability committee), but obviously, the scenario right now is that interest rates are going down. They go down for borrowers, they go down for depositors,” Kumar said on Friday.
RBI governor Shaktikanta Das on Friday said that transmission of older rate cuts has been improving.

The one-year median marginal cost of funds-based lending rate (MCLR) declined by 90 bps between February 2019 and May 15, 2020. “The weighted average lending rate (WALR) on fresh rupee loans has cumulatively declined by 114 bps since February 2019, of which 43 bps decline occurred in March 2020 alone,” Das said in his statement. The WALR on outstanding rupee loans declined by 29 bps between October 2019 and March 2020.

These cuts in lending rates, coupled with record levels of excess liquidity, have already caused deposit rates to come down. Since March 27, when the repo rate was slashed by 75 bps, SBI has lowered its savings rate by 25 bps to 2.75% and rates on fixed deposits (FDs) by up to 50 bps. Some of its peers from the private sector, such as HDFC Bank and ICICI Bank, have made similar cuts to their term deposit rates. This has resulted in savers drawing negative returns from FDs on a post-tax basis for months at a stretch. So much so that all three large banks have come up with differentiated deposit products for senior citizens who could pull out their money.

Bankers indicated that this trend could continue. Ashutosh Khajuria, executive director and chief financial officer, Federal Bank, said, “Since this is a repo rate cut and new loans since October 2019 have been linked to the repo rate, the impact on these loans will be from today. Some of the impact of that could pass on to deposit rates and the rest banks might take on their balance sheet.”

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