Deposit rates have been on a free fall since the beginning of RBI’s money-easing policy in January 2015. While this is not entirely out of place, the pace has been the fastest in the last decade-and-a-half.
Over the past two years, deposit rates have plummeted 200-250 basis points, even as the RBI reduced its key policy repo rate by 175 basis points. In the past, such steep fall in deposit rates happened only when the policy rate was reduced by 300-400 basis points.
The RBI’s neutral liquidity stance since April and the recent move to demonetise high-value notes have resulted in excess liquidity and led to deeper cuts in deposit rates this year. With banks expected to be flush with funds in the near term, deposit rates can trend down hitting historical lows. If the RBI had, as expected, cut rates in the latest policy, depositors would have felt more heat in the coming months.
In the past three rate easing cycles since 2001 — April 2001 to March 2004; October 2008 to April 2009; April 2012 to May 2013 — deposit rates have fallen 3-4 percentage points, but in tandem with similar cuts in policy rates by the RBI. Between April 2001 and March 2004, for instance, as the RBI lowered its key policy rate from 9 per cent to 6, deposit rates in the three- to five-year bucket also fell about 4 percentage points.
Similarly, between October 2008 and April 2009, deposit rates fell around 3 percentage points as the RBI slashed repo rate by 425 basis points to 4.75 per cent. The shortlived rate cut cycle between April 2012 and May 2013 saw repo rate move lower by 125 basis points, but deposit rates fell by a much lower 50 basis points.
In the recent rate-cut cycle since January 2015, however, slashes in deposit rates have been deeper. In 2016, reduction in deposit rates accelerated and fell another 125 basis points, even as the RBI cut its repo rate by only 50 basis points. Deposit rates in the three- to five-year category are currently hovering in the 6-7.25 per cent range from about 8.5-9 per cent in the beginning of 2015.
Shubhada Rao, chief economist at YES Bank, says: “The initial small decline in deposit rates was in response to RBI’s change in liquidity stance. The recent sharp decline in bulk deposit rates of a few banks has been due to the crowding in of liquidity in the banking system post the withdrawal of Specified Bank Notes.”
The idea to lower the deposit rates amid slowing credit growth in the economy is to dis-incentivise the flood of deposits as it comes with a cost, added Rao.
So how far can deposit rates fall from here? While past data may not be comparable, they do give an indication.
Looking backDeposit rates in India have mostly ruled high — in the late 1990s they were at 11-13 per cent levels. Since 2000, banks have been offering lower rates in the 9-10 per cent range. Over the last two decades, call money rates — the rate at which short-term funds are borrowed and lent in the money market — have fallen to 4-5 per cent levels during financial years ending 2003 and 2004 (rate easing period).
Deposit rates in the three- to five-year tenure then fell to 5.5-6.25 per cent. At present, call money rates are around the 6 per cent mark.
“We need to assess the quantum of durable excess liquidity, post the closure of window. Only then we can access how much permanent net deposit accretion has taken place. The banking system will subsequently review and recalibrate rates on certain deposits,” said Rao.