Banks cut rates on FDs of up to 3 years on easing liquidity

In an initial sign of easing in the interest rate scenario, major banks have started cutting interest rates on short-term fixed deposits (FDs) for up to 3 years driven by better systemic liquidity conditions and lower short-term money market rates.

Most lenders expect Reserve Bank of India to Pause on interest rates in its next fortnightly monetary policy This week after The CPI inflation reading for April came in below the central bank’s upper limit of 6 per cent.

As a result, the expectation that interest rates will remain at current levels for some time has relieved some of the pressure on deposit mobilization being slower than credit growth.

With credit growth expected to normalize over the course of the current fiscal year, lenders are more confident in supporting credit growth from the current pace of deposit mobilization and adequate system liquidity, thus reducing the need to raise deposit rates in the future.

deposit rates

Some small private banks and small financial banks continue to charge or offer high rates of spot financing contracts due to their smaller deposit base.

However, the larger banks like Axis Bank, Union Bank and Punjab National Bank, with much better capital adequacy, cut rates on term financing contracts from mid-May onwards. ICICI Bank cut rates on higher denomination FDs above Rs 2 crore while Punjab National Bank cut rates as part of the June review.

Cut off from 5-20 bp

Depending on the term, rate reductions range from 5-20 basis points for FDs of up to 3 years. As such, over the past year, lenders have been favoring one- to three-year deposit holdings since the bulk of credit growth so far has been driven by personal or retail loans and working capital demand.

Market participants expect a 20-30 basis point decline in short-term money market rates, including those on Certificates of Deposit (CDs), leading to further reductions in short-to-medium-term deposit rates as more investors follow suit. Lenders follow suit.

System fluidity

And while the system’s liquidity turned a deficit at the end of fiscal year ’23, it returned to a surplus in April on the back of government spending and central bank interventions in the currency.

The weighted average interest rate on local time deposits on new rupee time deposits fell by 12 basis points to 6.36 percent in April from 6.48 percent in March 2023. New deposit rates for PSU banks decreased by 14 basis points, and for private banks by 5 basis points. month, according to the latest RBI data.

Liquidity was further aided by the withdrawal of the ₹2,000 denomination banknote from circulation, as announced on May 19. It is currently estimated that the liquidity of the banking system is in excess of Rs 2.4 crore.

“The overnight call rate has remained in the 6.45-6.55 per cent range since May 19,” CareEdge said in a note.