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

Most lenders are expecting the Reserve Bank of India to pause on rates in its upcoming bi-monthly monetary policy this week after the CPI inflation print for April came below the central bank’s upper threshold of 6 per cent.

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

With credit growth also expected to normalise over the course of the current financial year, lenders are more confident of supporting credit growth from the current pace of deposit mobilisation and adequate system liquidity, thus reducing the need for future deposit rate hikes.

Deposit rates

Some smaller private banks and small finance banks continue to hike or offer elevated FD rates due to their smaller deposit base.

However, larger banks such as Axis Bank, Union Bank and Punjab National Bank, with much better capital adequacy, have cut rates on FDs of specific tenures mid-May onwards. ICICI Bank has cut rates on higher denomination FDs of over ₹2 crore whereas Punjab National Bank cut rates as part of its June revision.

5-20 bps cut

Depending on the tenure, the rate cuts are in the range of 5-20 bps for FDs of up to 3 years. As such, over the past year, one to three-year deposit tenure has been favoured by lenders given that bulk of the credit growth has so far been fuelled by personal or retail loans and working capital demand.

Market participants expect a 20-30 bps decline in short-term money market rates, including those on CDs (certificates of deposits), leading to more cuts in short to medium term deposit rates as more lenders follow suit.

System liquidity

While system liquidity had turned deficit towards the end of FY23, it returned to surplus in April on the back of government spending and central bank’s currency interventions.

The weighted average domestic term deposit rate on fresh rupee term deposits of fell 12 bps to 6.36 per cent in April from 6.48 per cent in March 2023. Fresh deposit rates for PSU banks were lower by 14 bps, and for private banks by 5 bps on month, as per latest RBI data.

Liquidity has been further supported by the withdrawal of ₹2,000 denomination banknotes from circulation, as announced on May 19. Banking system liquidity is currently estimated to be in a surplus of ₹2.4-lakh crore.

“The overnight call money rate has remained in the range of 6.45-6.55 per cent since May 19. This is closer to the prevailing repo rate of 6.50 per cent and indicates that the liquidity challenge of banks is subsiding,” CareEdge said in a note.