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Deposit rates may fall further as system still flush with liquidity

Shritama Bose
Deposit rates, liquidity, State Bank of India, SBI fixed deposits, RBI, CARE Ratings, RBI dollar purchases, credit growth

Even as deposit rates have fallen in tandem with the rate cycle throughout FY20, savers stand to lose a little more in the last month of the year, bankers say. With the system still seeing a Rs 2.5-3-lakh-crore daily liquidity surplus and credit growth stuck in single digits, banks see no point in shelling out more for deposits.

The interest rate paid by State Bank of India (SBI) on one-year term deposits of under Rs 2 crore has dropped by over a full percentage point to 5.9% at present from 7% in May 2019. Last month, FE had reported that real returns from fixed deposits (FDs) hit an over six-year low in January (-3.32%), which was also the fourth month in a row to fetch negative real returns for deposit holders. This state of affairs is a far cry from January 2019 when returns were at a seven-year high of 4.75%.

Bank deposit growth has fared better in FY20 compared with loan growth. According to a recent report by CARE Ratings, the incremental growth in bank deposits between April 2019 and February 14, 2020, was 2.8%, while incremental bank deposits grew 5.3% over the same period.

PK Gupta, SBI's MD – retail & digital banking, said deposit rates are a function of demand and supply. "Given the kind of liquidity surplus in the system, banks have access to a lot of money. The only thing is that you have to stay competitive in the market and so you reduce (rates) accordingly. If this condition continues, deposit rates will probably continue to fall. Ultimately if you are going to put all the money in the repo, high deposit rates don't make sense," Gupta added.

SBI's bulk deposits with a one-year maturity are now yielding 4.75%, below the repo rate of 5.15%. Union Bank of India MD and CEO Rajkiran Rai G said after the bank's Q3FY20 results new deposits into the bank are coming in at a lower rate. "We have been consistently cutting deposit rates over the last six months. They will go down gradually, but deposit rates can come down by another 20-25 basis points (bps) in the one-year bucket," he said.

Deposit balances in banks have shot up in recent months due to a combination of factors. The report by CARE Ratings said higher government spending (as evidenced from the zero surplus cash balances of the central government with the RBI since December 2019 end), month-end payments towards salaries and pensions and RBI dollar purchases (cumulative net purchase of $29 billion or Rs 2.05 lakh crore during April-December 2019) has also been adding to the surplus in the banking system.