The direction of deposit rates was evident when State Bank of India, India’s biggest bank, reduced savings rates early last month. Effective April 15, the country’s largest lender SBI will offer an interest rate of 2.5 percent for savings deposit rates.
ICICI Bank has cut fixed deposit rates by up to 50 basis points effective May 11. Deposits up to one year will now yield 5.25 percent while those above one year will earn 5.7-5.75 percent, according to the interest rate card on the bank's website.
Earlier, the bank used to offer 25-50 bps more on these maturities. There is no real surprise in this rate cut. With no demand for credit in a locked down economy, banks are flush with liquidity and do not want further inflow of deposits. In other words, banks want to disincentivise the inflow of deposits by making the returns less attractive.
It is not just about lacklustre credit growth. There is a general risk aversion among investors towards equities and mutual funds in a highly uncertain economic environment. Following the Franklin Templeton fiasco, there were heavy redemption pressures in mutual funds. In an uncertain environment, customers typically prefer safer avenues such as bank fixed deposits.
The direction of deposit rates was evident when State Bank of India reduced savings rates early last month. Effective April 15, the country’s largest lender SBI will offer an interest rate of 2.5 percent for savings deposit rates. This is the lowest-ever return Indian banks will offer to customers on their savings deposits.
Till last month, SBI used to offer 3.25 percent on these accounts, which was cut to 3 percent on March 11. The explanation behind SBI’s savings rate cut is that the bank has adequate liquidity and hence it doesn’t need to incentivise further deposit inflows.
The RBI’s liquidity easing measures and nearly zero demand for fresh loans mean banks are flush with liquidity. They do not need to chase low-cost deposits now as they used to do a while ago.