Banks will be under pressure to lower interest rates on fixed deposits (FD) as their lending margins come under threat of a further squeeze with the Reserve Bank of India (RBI) cutting repo rate by 25 basis points.

A free fall on FD interest rates, however, will be thwarted by bank deposit growth lagging behind the pace at which credit is growing. Banks are having to contest a flight away from deposits to stock investments, and a high credit-to-deposit (CD) ratio may also ensure that interest rate on term deposits do not see a sharp slump.

As per RBI data, banks’ CD ratio is over the 80% mark in October. Credit growth has picked up in the second quarter and some banks, including the State Bank of India (SBI), have revised upwards their credit growth target for FY26 on the back of GST (goods and services tax) rate rationalisation and festive season consumption uptick. The RAM (retail, agriculture and MSME) segment is driving this growth and corporate credit is expected to improve during the remaining part of the fiscal.

Banks have yet to transmit fully the first three repo cuts by 100 basis points this year, though FD rates have overall fallen during the period. The fourth rate cut ensures a lowering but in line with the RBI’s latest 25 basis-point cut is unlikely. A smaller margin 10-15 basis-point cut on FDs is what banks are expected to carry out.

A possible strategy will be to provide a window before cutting interest rates on FDs. The tenure deposits between one and two years, which is more popular among depositors, may slide less. Deposits with a longer maturity period will see a drop in interest rates but will still have to be made attractive. The savings bank rate at 2.50% to 3% is already at a low but could even fall lower.

The prospect of bank FDs fetching higher returns from their current rates has dimmed. Since February, the RBI has lowered the repo rate by 125 basis points this year to bring it down to 5.25%, with two rate pauses in the August and October bi-monthly monetary policies. Given the benign outlook on inflation, economists are of the view that the central bank has policy space for a further rate cut by 25 basis points.

A few small finance banks (SFBs) may stray to provide higher FD rates in shorter bursts as they seek to mobilise deposits, but it is unlikely that it will be a trend. The SFBs will, however, continue to keep their FD rates higher than banks.

For depositors, the best way forward is to lock in their FDs early as the possibility of a rate increase has evaporated in the current monetary easing cycle. As for borrowers, loan rates are set to fall. And for banks, net margins are under threat of narrowing.