Prepare yourself for lower returns on FDs
MUMBAI: Your fixed deposits are likely to fetch you lower returns as banks gear up for further reduction in the interest rates in the next few months.

State Bank of India, the country’s largest bank, has cut its one-year fixed deposit rate by 1.30% (to about 7.25% for amounts below ₹1 crore) since January 2015. Overall banks have seen reduction of close to 1%.
In the same period, the Reserve Bank of India’s repo rate has been reduced by 1.5%.
Paresh Sukthankar, deputy managing director, HDFC Bank said ,“Banks will get comfortable with liquidity and over the next few months we should see deposit rates coming down. I don’t think banks will be uncomfortable cutting deposit rates unless we see substantial credit growth…So one-year deposits should see about 25-50bps (0.25-0.50%) cut in one or two tranches in the next one or two quarters.”
The central government also slashed its small savings rate in March this year in order to keep them linked to market rates. Small saving interest rates follow the yield on government bonds of similar tenures.
The interest rate on one-year time deposit, which is equivalent to one-year fixed deposit, were slashed by 1.4 percentage points to 7.1%. The returns on 11 other small savings schemes were also made in March.
The returns on small savings were kept unchanged in the government’s latest review in June
Ashutosh Khajuria, executive director and CFO of Federal Bank said, “In the next 2-3 months, say by early October, we could see deposit rates coming down subject to the RBI also cutting key policy rates. Though there is no immediate need to reduce rates, if the retail inflation softens and monsoon plays out as expected, it (deposit rates) could be reduced.”
Typically, a central bank lowers its benchmark rates whenever it is comfortable that inflation is low and there is a need to raise demand to boost industrial and economic activity.
Abhishek Bhattacharya, associate director with India Ratings, said ,“Growth is expected to pick up and hence banks will further try to cut costs by reducing interest rates on high-cost deposits. Barring a few mid-sized banks, we expect banks to take advantage of the opportunity and cut rates (deposit) by around 0.25-0.50% over the next 6-9 months.”
However, this interest rate easing cycle is yet to reflect in banks’ lending rates, which have fallen by just about 0.60% since January 2015.
Khajuria expects lending rates to reduce going forward as industrial growth is set to pickup and India’s risk factors such as monsoon, reforms, etc being taken care of amid negative interest rates across global central banks.
But with the RBI governor Raghuram Rajan sticking to his stance on no cut in rate still inflation is under control, it will be some time, before customers see their equated monthly installments (EMIs) fall.