Context:
The ongoing monetary easing cycle by the Reserve Bank of India (RBI) is expected to lead to modest deposit rate cuts, unlike the sharper declines witnessed in the previous cycle. Several macro-financial and regulatory factors are limiting banks’ ability to pass on rate cuts aggressively.
Key Highlights:
Current vs. Previous Easing Cycle:
- Current cycle repo rate cut (so far): 50 basis points (bps) — 25 bps each in February and April 2025.
- Expected cut: Around 100 bps, compared to 250 bps in the 2019–2022 easing cycle.
- In the previous cycle, term deposit rates fell by 209 bps (retail) and 259 bps (bulk+retail).
Factors Limiting Further Deposit Rate Cuts:
- High Credit-Deposit (CD) Ratios: Still above 80%, limiting liquidity flexibility.
- Revised LCR Norms: Delayed by a year, but banks are preparing for compliance.
- Potential Increase in Deposit Insurance Coverage: Expected to raise cost of funds and restrict deposit repricing.
- Demographic Composition: A large share of deposits comes from middle-aged and senior citizens, requiring rate stability.
Transmission Remains Gradual:
- Banks have been slow to transmit repo cuts due to liquidity deficit and competition for deposits.
- Deposit rate cuts implemented so far:
- SBI: 10 bps
- Bank of India: 25 bps
- Kotak Mahindra Bank: 15 bps
- Canara Bank: up to 20 bps
- HDFC Bank: 35–40 bps on FDs
- Yes Bank: up to 25 bps
Consumer Behavior and Deposit Trends:
- Customers are increasingly locking into short- to mid-term fixed deposits expecting future rate declines.
- Migration from savings accounts to FDs is occurring for better yields.
- Higher FD rates for 1–3 year tenures are currently more attractive, especially for senior citizens.
Despite the RBI’s dovish stance and gradual repo rate cuts, banks are cautiously revising deposit rates, balancing between regulatory obligations and the need to retain depositors. As monetary easing progresses, incremental cuts may continue, but aggressive reductions appear unlikely.
