RBI’s Rate Cuts: Impact on Depositors Limited

MUMBAI: The Reserve Bank of India (RBI) initiated a rate-cutting cycle in February, reducing the repo rate by 25 basis points. While this move has benefited home loan borrowers, deposit rates have largely remained stagnant. Recent data reveals that the weighted average domestic term deposit rate (WADTDR) has reached an eight-year high, yet many banks have not significantly lowered their fixed deposit rates.

Limited Impact on Deposit Rates

Despite the RBI’s efforts to stimulate the economy through rate cuts, the effect on depositors has been minimal. The WADTDR hit 6.91% for the fiscal year 2024-25, peaking at 7.02% in February. A few banks, including Bank of Baroda, HDFC Bank, and Yes Bank, have made slight reductions in their deposit rates, ranging from 15 to 40 basis points. However, this has not resulted in a widespread decrease across the banking sector. The lack of a broad-based reduction is evident in both the weighted average deposit rate and the marginal cost of lending rate, which significantly influences lending to businesses.

Anticipated Repo Rate Cut

The RBI is expected to announce another 25 basis point cut in the repo rate at the conclusion of its three-day monetary policy committee meeting on Wednesday. However, the transmission of this cut into banks’ cost of funds may experience delays. This lag is partly attributed to changing depositor behavior, with many investors shifting their focus to stock markets and moving excess funds from savings accounts to fixed deposits. Anil Gupta, senior vice president at ICRA, noted that the current market volatility may influence retail investor behavior over time. He emphasized the need for a significant narrowing of the gap between savings account and fixed deposit rates to encourage a shift in funds.

Future of Fixed Deposit Rates

Experts predict that fixed deposit rates may not see steep reductions due to pressures on banks’ liquidity coverage ratios. Gupta suggested that if the RBI implements a 75 basis point reduction in the current cycle, funding costs could decrease by 30 to 35 basis points. Madan Sabnavis, chief economist at Bank of Baroda, highlighted that the transmission of rate cuts will depend on individual banks’ circumstances. With liquidity stabilizing, there is a possibility that banks may lower deposit rates, although not proportionately. This could influence the Marginal Cost of Funds-based Lending Rate (MCLR) and overall lending rates.

Potential Policy Shifts

Should the RBI adopt a more accommodative policy stance, banks may be more inclined to reduce rates. A shift in stance would signal a readiness to ease further if financial markets experience volatility. Currently, External Benchmark Lending Rates (EBLR) align with the repo rate, while MCLR-based loans are linked to deposit rates. If the RBI lowers rates further, a higher degree of transmission is expected, especially given the current comfortable liquidity situation.

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