The State Bank of India has become the first Indian bank to link its deposit rates to an external benchmark. This is the first step the bank has taken towards linking its loan rates to an external benchmark as mandated by the Reserve Bank of India.
SBI savings accounts offer an interest rate of 3.5% currently. The bank has now decided to link this rate to the repo rate for any account with deposits over Rs. 1 lakh. The current repo rate is 6.25%. SBI has fixed its spread at -2.75% on the repo rate. The repo rate is the rate at which the Reserve Bank of India lends to commercial banks. Therefore, any change in the repo rate will automatically reflect in the SBI deposit rate. Let’s say the repo rate increased by 0.25% to 6.50%. Then, the SBI deposit rate will automatically reset by that margin, rising to 3.75%. The new regime will be effective from May 1.
Which Other Products Are Impacted?
SBI’s cash credit accounts and overdrafts over the Rs. 1 lakh limit will also be linked to the repo rate with a spread of 2.25%. Today, the rate would be 8.50%. From April 1, all bank loans will also be linked to external benchmarks. However, no bank has yet announced their plans regarding this.
Why Was This Done?
In December, during its bi-monthly Monetary Policy Review, the RBI had instructed all banks to link interest rates to one of the following four external benchmarks: the repo rate as decided by the RBI, the 91-day or 182-day Treasury Bills, or any other benchmark produced by the Financial Benchmarks India Private Ltd. This new regime will be effective from April 1, 2019.
Why Did RBI Change The Benchmarking Regime?
TL;DR – the RBI wants its policy rate cuts to be transmitted to retail customers in a more efficient manner. For example, in February the RBI announced a 0.25% reduction in the repo rate. However, most banks have passed only 0.05% to 0.10% of this cut to customers. Banks link their deposit and loan rates to internal benchmarks. But with the new regime, the banks can only control the spread that they will charge over the benchmark rate, which is now being set externally.