Portfolio

Why the RBI’s policy may matter little to depositors?

Radhika Merwin BL Research Bureau | Updated on January 12, 2018 Published on June 07, 2017

While all eyes are on the RBI’s rate action and policy stance, which will be out in a couple of hours, for one segment of the market, the central bank’s action appears to matter little.

Depositors, who have been grappling with sharp cuts in deposit rates through 2016, have been feeling the heat in recent months too, despite the RBI holding rates since its October policy last year.

Banks have continued to cut deposit rates in 2017; a few banks have, in fact, cut deposit rates by a sharp 25-40 basis points across tenures over the past two months since the RBI’s last policy in April.

What gives?

Between April and November 2016 (before the demonetisation move), deposit rates had fallen by around 30-50 basis points in leading banks across various tenures. But with bank deposits swelling following the Centre’s move to scrap old high denomination notes, deposit rates fell by a substantial 50-100 basis points across banks between November and February this year.

The plight of depositors has not eased much in recent months despite these sharp moves. Between the RBI’s February and April policy, few banks such as SBI, Central Bank of India, IDBI, and SBI continued to lower deposit rates by 10-25 basis points despite the central bank holding its key policy rate.

Over the past two months, the fall has been steeper, led by PSU banks. Bank of Baroda, for instance, has cut its deposit rates by as much as 50-75 basis points in certain tenures between the end of March and now. IDBI Bank has made sharp cuts over the past two months. Other banks such as Bank of India, Canara Bank, Central Bank of India, Corporation Bank, Punjab National Bank and SBI have also lowered deposit rates by 25-40 basis points since April.

Given the still abundant liquidity in the system, banks may continue to tinker with deposit rates to ward off margin pressure on account of weak credit growth.

Bottomline, even if the RBI holds rates in today’s policy, depositors may see pain in the months ahead. On the other hand, if the RBI -- much to borrowers’ delight -- cuts its policy rate, depositors’ woes could only worsen.

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