ICICI Bank on Monday slashed interest rates on fixed deposits (FDs) by up to 50 basis points (bps), following similar rate reductions by its larger peer State Bank of India (SBI).
ICICI Bank on Monday slashed interest rates on fixed deposits (FDs) by up to 50 basis points (bps), following similar rate reductions by its larger peer State Bank of India (SBI). The deepest cuts were made on deposits with maturities of less than one year, with FDs maturing in one year or longer took smaller rate cuts. A one-year fixed deposit with the private lender will now earn 5.7%, down from 5.8% earlier. SBI offers 5.5% on deposits of the same tenure, while one-year FDs with HDFC Bank yield 5.8%.
The rate cuts follow a massive 75 bps reduction in the repo rate on March 27 and record levels of surplus liquidity with banks. Last week, the amount of money banks parked with the Reserve Bank of India (RBI) under its reverse repo window had gone up to over Rs 8.5 lakh crore in the absence of credit demand.
Analysts say that in addition to the rate cut and targeted long-term repo operations (TLTRO), the abundance of liquidity in the system is also a result of deposits with banks growing much faster than lending. For the fortnight ended April 24, deposits grew 9.83% year-on-year (y-o-y) to Es 137.11 lakh crore, while outstanding credit in the system grew at a much slower 6.67% y-o-y to Rs 102.17 lakh crore.
“Banks continue to be risk averse and their credit dispersal remains restrained. The surge in the excess of bank funds being parked with the RBI (in the reverse repo facility) even at a low rate of return bears testimony to that,” CARE Ratings said in a report on Monday. The reverse repo rate stands at 3.75%.
A crisis in some categories of debt mutual funds as also falling equities have meant that banks have more room to lower deposit rates, given the risk aversion among savers. Certificates of deposit (CDs), too, have turned cheaper, with the one-month CD rate sliding to 4.7% in April from around 5.5% in October 2019.
In April, rates on small savings schemes were lowered, effectively giving banks more elbow room to cut deposit rates. Depositors in India have been drawing negative real returns from their FDs for over six months even as consumer inflation has been falling. Bankers say that the near-term trajectory of deposit rates will depend on how other asset classes perform as also the impact of the government’s increased borrowing limit on system liquidity.