With the RBI cutting its policy repo rate sharply over the past few months amid growing pandemic concerns, banks, too, have been wielding the scissors on deposit rates.
Since this March, fixed deposit rates have fallen by 100-125 basis points across many banks, even higher in some cases. In fact, deposit rates fell significantly in 2019 and were on a free fall in the beginning of this year, even before the RBI embarked on its fast-paced rate easing cycle since March.
The fallout? Savers are stuck with bank deposit rates that are at near two-decade low levels. Currently (as of mid-June), public sector banks (PSBs) on an average offer 5.2-5.45 per cent on their 3-5 year deposits. The last time deposit rates were near around these levels were in 2003 and 2004.
With the pandemic crisis expected to be long-drawn and the RBI expected to cut rates further, bank deposit rates are set to fall even more in the coming months. While a few private sector banks offer much higher rates (over 7 per cent in some cases), the YES Bank episode has turned depositors wary of parking large sums of money in some of them.
Not only are savers left with little choice with bank deposits, their kitty of alternative safe and fixed income options has also shrunk over the past year. Small saving schemes offered by the post office — that have always enjoyed an advantage over bank deposits by offering much higher rates — are fast losing sheen. Recently (for the April to June 2020 quarter), rates on the popular small savings schemes were cut by 80-140 basis points, reducing the attractiveness of these schemes over bank deposits.
The rate on the popular National Savings Certificate (NSC) at 6.8 per cent, Public Provident Fund at 7.1 per cent and Senior Citizen’s Savings scheme at 7.4 per cent are the lowest since 1992. These rates will most likely fall further in the coming quarters as broader rates in the economy and yield on G-Secs continue to decline.
More cuts
In a falling rate scenario, banks are often more quick to cut deposit rates than lending rates. In the current scenario, surplus liquidity and weak credit growth have only nudged banks to be nimbler.
Overall, at the system level, there is excess liquidity with banks. In June, banks have parked over ₹6-lakh crore under reverse repo on a daily average basis. Banks have turned highly risk averse to lending and even cautious to investing in government bonds (fearing mark-to-market loss).
Hence, to cushion the impact of lower interest income on margins, banks have been cutting deposit rates significantly. In fact, SBI had cut its savings deposit rate to 2.7 per cent last month (for deposits up to ₹1 lakh).
However, the liquidity situation is not uniform across banks. In some private sector banks, there has been outflow in deposits (post YES Bank crisis) and in some others steady fund flows are essential to support growth (high credit deposit ratio). Hence, many private banks and small finance banks with smaller deposit base continue to offer much higher rates.
The RBI has already cut the repo rate by 115 basis points so far. With more cuts on the anvil, bank deposit rates are likely to fall further (in varied proportions across banks) in the coming months.
Small savings lose sheen
Interest rates on small savings schemes have always been kept attractive to ensure steady flow into these schemes. For instance, from April 2012 until March 2016, rates on these schemes were hardly tweaked despite two rate easing cycles. To align the rates on small savings schemes with market rates, effective April 2016, the Centre had decided to revise them every quarter based on the prevailing rates on G-Secs.
But, interest rates on small savings schemes have not moved in sync with the movement in G-Sec yields. For instance, in the whole of 2019, interest rates on small savings scheme were reduced only once (July-September 2019), by a mere 10 basis points, even as the yield on 10-year G-Secs had fallen by 80-90 bps.
But rates for the April-June quarter this year were reduced sharply by 80-140 bps, narrowing the gap drastically between rates offered by post office schemes and most bank deposits.
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