RBI Explores Introduction of Sub-7 Day Fixed Deposits: Key Insights
The Reserve Bank of India (RBI) is exploring the possibility of introducing term deposits with durations shorter than seven days, seeking feedback from banks on this initiative. This move comes in response to a decline in deposit growth, which has dropped to 10% year-on-year as of May 2025, down from 13% the previous year. The RBI’s proposal aims to enhance the attractiveness of fixed deposits and improve liquidity within the banking system, but it has sparked mixed reactions among financial institutions.
Feedback from Banks Required
The RBI has requested banks to provide their feedback on the potential introduction of fixed deposits with tenures shorter than seven days by the end of the current month. This initiative could allow banks greater flexibility in setting deposit tenures, which may attract more customers. A bank executive noted that this change could enhance the appeal of fixed deposits and improve liquidity in the banking sector. The RBI’s consultations with major banks, including the State Bank of India and Punjab National Bank, indicate that discussions are still in the preliminary stages. The central bank has not yet confirmed whether banks will have the autonomy to determine deposit durations.
Challenges in Deposit Growth
According to a recent report from SBI Research, the swift transmission of rate cuts has led to immediate downward pressure on deposit rates, complicating the collection of deposits for banks. As of May 2025, deposit growth has significantly slowed, prompting the RBI to consider changes to deposit terms. In 2004, the RBI had already reduced the minimum tenure for term deposits from 15 days to one week. The current discussions aim to address the challenges faced by banks in attracting deposits amidst a competitive financial landscape.
Mixed Reactions from Financial Institutions
The proposal to allow shorter-term fixed deposits has elicited varied responses from banks. Some institutions have expressed concerns about the potential removal of the minimum week-long tenure, citing asset liability mismatch (ALM) as a significant issue. ALM risk arises when the maturity periods of assets and liabilities do not align, which can create liquidity challenges for banks. A senior official from a public sector bank pointed out that while shorter fixed deposits may benefit companies looking for better returns on temporary surplus funds, they could pose difficulties for banks in managing their lending practices.
Future Considerations
The Indian Banks’ Association (IBA) plans to submit its response to the RBI by the end of the month after consulting a broader range of banking institutions. As the discussions continue, the implications of allowing shorter-term fixed deposits will be closely monitored. While some banks see potential benefits, others remain cautious about the risks involved. The outcome of these consultations will play a crucial role in shaping the future of deposit offerings in the Indian banking sector.
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