Key Highlights

• Banks cut fixed deposit interest rates by 30–70 bps following RBI’s 50 bps repo rate cut.
• Savings account rates fall to 2.5–2.75%; SBI reduces SB rate to historic 2.5% level. 

Since February, the Reserve Bank has cut the key lending rate by 100 basis points to 5.5%, lowering the cost of funds in general, particularly for depositors.

Borrowers have benefited, particularly those on repo-linked floating rates, but not to the extent of depositors' losses. Analysts expect more downward pressure on term deposit pricing, despite the fact that savings bank deposit rates at the country's largest lender, SBI, have hit a record low of 2.5%.

Repo-linked loans account for only about 45% of the credit system. Though, by definition, when the RBI lowers repo rates, existing lending rates must fall in equal proportion, banks have some leeway in passing on the reduction to the rate re-set date, which typically begins on the first of each month. Banks can also set internal thresholds based on the size of the borrowed amount to avoid fully lowering the rate. A borrower of a home loan with an outstanding of say '25 lakh should get '4 lakh in interest benefits alone with the 100 bps reduction in repo rate since February — 25 bps each in the February and April reviews, and an unusual 50 bps in the June policy review. However, banks have not yet fully reflected these cuts.

At the June review, Governor Sanjay Malhotra told reporters that monetary policy transmission—the central banking jargon for lenders passing on RBI rate cuts to borrowers—has been slow thus far. This is why he made another unconventional move, lowering the CRR by 100 basis points to 3% in four equal installments beginning September 1 and ending November 29, when banks will have Rs 2.5 trillion in additional liquidity.

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He stated that the weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans fell only by 6 bps and 17 bps, respectively, between February and April, indicating a very slow policy rate transmission to lending rates. The governor, on the other hand, stated that the weighted average domestic term deposit rates (WADTDR) on new deposits fell by 27 basis points, while WADTDR on existing deposits fell by 1 basis point during the same period when the repo rate fell by 50 basis points.

Anil Gupta, senior vice-president and co-group head of financial sector ratings at Icra Ratings, expects bank peak term deposit rates to fall another 25 basis points from now.