Get ready to see interest rates on fixed deposits (FDs) slide. After the Reserve Bank of India (RBI) has cut the benchmark repo rate by a larger-than-expected 50 basis points (bps), there is no other way deposits can go.

Yes, deposits may still continue to lag behind credit growth. Yes, banks may have to compete harder to garner your deposits. But in a cheaper money scenario, don’t be under the illusion that banks will fight bitterly amongst themselves and you will be in the sweet spot to earn more from your FDs. 

That leverage has been taken away after the RBI went in for a third successive interest rate reduction, bringing the repo rate down by 100 bps to 5.5%. That more or less defined the route deposits are to take.

When the RBI started the monetary easing cycle with a 25 bps cut in February this year after a long gap since May 2020, banks could still hesitate to drop deposit rates amid sluggish growth and stiff competition. They could still afford not to be quick to respond when the repo got cut the second time in a row by a similar size in the April policy, but had to then tinker with the savings and fixed deposit rates when they realised that the third successive one would be no different in June. Now deposits across all tenures have to head south, sooner or later.

A reduction in cash reserve ratio (CRR) by 100 bps to 3% has also ensured that an additional Rs 2.5 lakh crore will flow into the banking system later this year, providing durable liquidity, expanding the pool of lendable funds and lowering cost of funds. CRR is the share of deposits banks have to keep with the RBI.

In a situation where liquidity is abundant, banks will tend to push deposit rates down. This drive downhill gets further impetus when the demand for credit has issues with corporates being flushed with funds and, if required, can tap market instruments. Amid uncertain consumption demand, private investments have been restrained to overbuild. Credit growth in May has, in fact, dropped to below 10% for the first time in three years. With lending opportunities getting limited, banks would prefer to soften deposit rates rather than pile up high-cost liabilities.    

Some banks have already started the process of cutting term deposit rates ahead of the RBI’s June monetary policy. Canara Bank reduced the one-year tenure deposits by 10 bps to 6.75% and those between three and five years by 25 bps to 6.75%. Similarly, Punjab National Bank cut the rate by 10 bps to 6.7% for deposits between one year to 389 days, while the 390-day tenure deposit rate was lowered to 6.9% from 7%. 

RBI Governor Sanjay Malhotra said the current pace of transmission is “better than in past cycles”, but emphasized the need for faster pass-through. The average deposit rates have declined by 27 bps while lending rates on outstanding credit have come down by 17 bps since the repo rate cut in February, he said in a post-policy press conference. 

The interest rate on FDs has started falling after the RBI’s third straight repo cut. For the top-tier banks, the highest interest rate for FDs has plunged to below 7%. The mid-sized private banks like IDFC First Bank have also lowered the rates and in the next round could bring it to under 7%. 

For depositors, the best time to lock in their FDs is now, before rates fall further and the first phase of CRR cut starts rolling out on 6 September.