Rate cut, easing liquidity to help banks cut deposit rates

Last Updated: Mon, Jan 07, 2013 04:58 hrs

Banks are set to cut deposit rates (DRs) if the Reserve Bank of India (RBI) cuts the repo rate, at which it lends to them, in the third-quarter review of monetary policy scheduled on January 29.

The liquidity deficit in the system, which shows signs of easing, is also contributing to the softening of DRs.

While the market is betting for a 25 basis points cut in the repo rate, now eight per cent, borrowing by banks from RBI's daily liquidity adjustment facility (LAF) fell to Rs 59,955 crore on Friday, compared with a daily average borrowing of a little over Rs 100,000 crore in the past month, as the government has started spending.

In the current financial year, banks have cut DRs by 50-100 basis points.

A further cut will make investment in bank fixed deposits a slightly more unattractive option for retail savers. "The cut (in DRs) may be in different maturity buckets, depending upon the requirement of the bank. But banks will cut deposit rates," said Ram Sangapure, general manager, Central Bank of India .

Some of the smaller banks, such as Dena Bank and Federal Bank, which recently raised their DRs in selective buckets, might also bring those down.

A K Dutt, executive director, Dena Bank, said if RBI cuts the repo rate on January 29, they would bring down their lending rates to levels before the December increase.

In fact, a few banks might simultaneously cut their BR. Abraham Chacko, executive director at Federal Bank, said they'd take a decision in their asset liability committee meeting, on reducing the base rate and DRs, if RBI cut the repo. Lending rates continue to be high; this year, banks have reduced these by only up to 25 basis points.

"The extent of rate reduction will depend on the rate cut impact on 90-180 day deposit rates. The relevance to policy rate moves is ideally linked to lending rates, as DR movements are linked to the need and tenor preference," said J Moses Harding, head of the asset liability committee and of economic and market research at IndusInd Bank.

Rajiv Mehta, analyst with local brokerage IIFL, feels if there is a repo rate cut, banks will have to necessarily cut their DRs to bring down their lending rates.

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