Interest Rates Drop to Lowest in 17 Years, Amidst Lockdown

Interest rates drop on fixed deposits leading to a cut down to a 17-year low after State Bank of India (SBI) slashed the coupon on a one-year deposit by 40 basis points leading to a plunge to 5.1%. As against this, the lender was offering 5% for one-year money, in November 2003.

While other banks give higher interest rates, HDFC Bank pays 5.6% and both Bank of Baroda and ICICI Bank pay 5.55% for a similar offering. It is possible these lenders too will lead to interest rates drop at a time of lockdown when lending opportunities are limited.

To be secured enough, banks and lending institutions have been trimming lending rates such as a home loan from SBI, for a loan amount of up to Rs 30 lakh will cost the borrower 7.4% down from 9.45% four years ago.

Interest Rate

Consequently, they see little or no reason to attract deposits and are reducing interest rates so as to protect their margins. However, even though interest rates drop is trending for close to two years now, deposits continue to surge and are currently increasing at a robust rate of 10-10.5% year-on-year.

This has left lending institutions with a large surplus of close to Rs 8 lakh crore which is being parked with RBI for a return of just 3.35%.

Financial experts believe that the steady rise in deposits is due to a lack of spending opportunities during the lockdown as well as due to the fact that consumers have turned increasingly cautious over the past year or so and prefer safer investments.

Uday Kotak, MD & CEO, Kotak Mahindra Bank said that the lending institutions were witnessing very high inflows of deposits in spite of having interest rates drop in April. Earlier this week, the bank lowered the savings interest rate further to 3.5%.

While the interest rates drop on deposits will benefit banks over some time, the impact is felt over a larger sum of around Rs 125 lakh crore. In contrast, a cut in lending rates affects a much smaller mass of people. The interest rates drop by SBI follows a steep 115 basis points cut in the repo rate announced by RBI in two back-to-back cuts by the monetary policy committee (MPC). This initiative comes ahead of an asset-liability committee (ALCO) meeting.

Since a section of the banks’ loan books is now directly linked to the repo rate, they have been quick to share the rate cuts to depositors as well. There are exceptions to this though, such as IndusInd Bank, which has raised deposit rates to stem outflows, substantially low deposit rates are now the new normal. SBI has cut its deposit rates for most of its tenures except for the 5-10-year one, where the rate was lowered by only 30 bps.

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