Reserve Bank of India (RBI) governor Duvvuri Subbarao has given the first hint of interest rates heading downwards.
At the monetary policy review on Tuesday, he cut the cash reserve ratio (CRR) of banks by 50 basis points to 5.5% — meaning, banks will have to keep 5.5% of their deposits with the RBI as a safety measure instead of 6%.
Personal finance experts say it is time to begin locking into fixed deposits at the high rates prevailing now. But rates are unlikely to fall fast because the RBI’s move to cut CRR releases only Rs32,000 crore into the banking system, while banks have been borrowing by more than Rs100,000 crore every day from the central bank to meet their needs.
“One has to be really circumspect about cutting deposit rates,” said Pratip Chaudhuri, chairman of the State Bank of India, alluding that it is a function of what are the competing instruments in the market.
Subbarao also reduced India’s GDP growth for this fiscal to 7% from 7.6%.
Subbarao said it is important for the government to reduce spending for the RBI to confidently reduce rates, lest it stoke inflation (more money will chase more goods, lifting prices or inflation).
Rajat Monga, group president- financial markets & chief financial officer, Yes Bank, said interest rates on savings accounts will start going down once medium-term fixed deposit rates start falling.
Yes Bank offers 7% and 6% interest rates on accounts with a balance above Rs1 lakh and up to Rs1 lakh respectively.
Only five banks, including Yes, had hiked the saving bank account rates after RBI deregulated them in October last. IndusInd and Kotak Mahindra raised it to 6% and 5.5%, respectively. Karnataka Bank and Ratnakar Bank also hiked their saving account rates.
Vaibhav Agrawal, vice president- research, Angel Broking said for smaller banks, savings account rates function as tools for customer acquisition and raising their savings account base, which is a cheap source of money for banks.
“Once RBI starts cutting repo rates, deposit rates will begin to fall and these banks will be forced to look at cutting down savings account interest rates,” said Vaibhav Agrawal, vice president- research, Angel Broking.
But Manish Sinha, head of consumer assets at HSBC India, said service, rather than interest rates, is a strong driver. “If a customer is really rate-sensitive, he would rather put his money in a fixed deposit where he gets a higher rate for a slightly higher tenure,” Sinha said.
Paresh Sukthankar, executive director, HDFC Bank, concurs. “For some quarters now, people are preferring fixed deposits as a mode of investment,” he said.
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