Data from the Reserve Bank of India (RBI) showed that deposits with the banking system grew 10.65% year-on-year(y-o-y) during the fortnight ended May 8.
State Bank of India (SBI) and ICICI Bank cut interest rates on savings deposits by five basis points (bps) and 25 bps, respectively, at a time when the repo rate has undergone massive cuts and liquidity remains in surplus.
All savings accounts with SBI will now earn 2.7% per annum. At ICICI Bank, a savings account with a balance of less than Rs 50 lakh will now yield 3% per annum, while those with a balance of Rs 50 lakh or more will earn 3.5%.
This is SBI’s second cut to the savings rate in as many months. Last week, the country’s largest bank had slashed term-deposit rates to levels not seen in the last 17 years.
The rate cuts by banks follow a steep drop in the repo rate over the last two months. In two back-to-back monetary policy reviews, the monetary policy committee (MPC) has lowered the repo rate by 115 bps between March 27 and May 22. As a portion of banks’ loan books are now linked directly to the repo, they have been quick to pass on the rate cuts to depositos as well.
Lenders have also gained confidence about paying depositors less as the latter seem unlikely to pull their money in the current environment. Data from the Reserve Bank of India (RBI) showed that deposits with the banking system grew 10.65% year-on-year(y-o-y) during the fortnight ended May 8, while non-food credit grew much slower at 6.48% y-o-y.
Analysts expect deposit rates to continue to fall across the banking system, with lender shaving a strong liability base better-positioned to cut rates and preserve margins. In a recent report, Motilal Oswal Financial Services said, “The continued monetary easing would drive further reduction in lending yields under the external benchmark and a decline in the one-year MCLR rates (20-50 bps reduction since January 2020) while banks have also been sharply cutting the retail and bulk deposit rates over the last few months (large banks have reduced TD rates by up to 150 bps) to offset margin pressure. Overall, we believe that large banks with strong/granular liability franchise would be able to tackle the margin pressure v/s their mid-sized peers.”