Continuing with the trend after three major banks recently cut their fixed deposit (FD) interest rates, Axis Bank and the DCB Bank also announced similar cuts for specific tenures.
Bank of India, Punjab National Bank (PNB), and IndusInd Bank reduced the rates on select durations over the past two months. Small financial banks also have followed suit. While these cuts might appear counterintuitive in light of the Reserve Bank of India's (RBI) unchanged repo rate, financial experts seek to decode the rationale behind these moves.
Factors Driving Rate Cuts
Anita Gandhi, whole-time director and head of institutional business at Arihant Capital, points out multiple factors that drive a rate cut decision. "One primary factor is the substantial deposit inflow banks have experienced through term deposits offering special interest rates. This approach, while boosting deposit bases, has simultaneously escalated the cost of funds for banks, impacting their Net Interest Margins (NIMs)." NIM is the difference between the money a bank earns on loan interest and the amount it pays as interest on deposits.
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"To address this challenge, banks are shifting their focus towards growing deposits via the current account and savings account (CASA) channels," she says. Further, she points out that withdrawing Rs 2,000 denomination currency notes from circulation has injected additional liquidity into the banking system, reducing the immediate demand for traditional deposits.
Gandhi explains that the rate cuts implemented by banks have been tactical and targeted only on specific maturity periods of deposits rather than being universally applicable. This strategic approach allows banks to alleviate pressure on their NIMs while targeting specific deposit segments for adjustment.
Future Of FD Rate Landscape & Options For Investors
Farooq Nabi, Director & Unit Head at Anand Rathi Wealth Ltd, delves into the complex factors influencing recent drops in FD rates. "To understand the recent drop in FD rates done by banks, we need to understand the factors affecting the FD rate movement; the prime reasons are monetary and fiscal policy—repo rate, inflation, and liquidity in the banking system."
He highlights that FD rates have only been reduced selectively by 5 to 100 basis points (bps) in tenures ranging from 1 year to 18 months. "So, it is a selective move by the banks," which proves that the shift aligns with banks' desire to enhance their net interest margins, says Nabi.
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He predicts that the recent hike in the Consumer Price Index (CPI) may lead to measures aimed at reducing excess liquidity from the banking system. He speculates that the RBI Monetary Policy Committee (MPC) might opt for a status quo or a 25 bps increase in the repo rate in the coming quarters, leading to banks refraining from cutting FD rates in the short term.
"Presently, liquidity in the banking system is adequate, thanks to the withdrawal of Rs 2,000 notes from circulation by the government in June 2023, which explains why banks are looking to improve their net interest margin (NIM)," he adds.
Despite these adjustments, Nabi says that certain FDs can still offer good returns to investors.
"Top 1-to-3-year FDs in several banks still offer interest in the range of 7.25 per cent to 8.20 per cent and 7.5 per cent to 8 per cent, respectively. Risk-averse investors who prioritise interest income can lock in their FDs for these durations or even three to five years. Hybrid conservative or equity savings schemes could also prove to be favourable alternatives," Nabi says.
In conclusion, these rate cuts are a strategic response to strike a balance between attracting deposits and maintaining profitability.
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