That Giant Crashing Sound You Hear Is Bank Deposit And Lending Rates Falling 

Most banks cut deposit rates soon after the government announced the demonetisation of high-value notes. The stage is now set for a more fundamental correction in deposit and lending rates, with even the savings rate now being targeted for a cut.

Savings rates were deregulated five years ago, but government control over public sector banks has ensured that none of them cut rates below 4 per cent. Some private banks with small customer bases, Yes Bank and Kotak Mahindra Bank, among them, even offered higher savings rates of 6 per cent to attract new depositors.

All this may be about to change. Mint newspaper reports that banks are likely to cut the idle savings balances rate, perhaps by 0.5 per cent (50 basis points) to 3.5 per cent.

This is big, for banks hold more than a quarter of their deposits in savings accounts (according to statistics for the year to March 2015, the latest available), and a significant cut in the savings rate will mean large savings for banks. Fixed deposit rates are already down, and could come down further once savings rates are chopped.

In the two weeks after demonetisation, private sector banks cut rates on deposits by upto 0.25 per cent, while State Bank of India, which was inundated with deposits, cut short-term rates even more sharply. The 180-210-day deposit rate was cut by a massive 1.9 per cent to 3.85 per cent for bulk deposits, taking it below even the savings bank rate. This was an indicator of the fact that money will be in excess supply in the next six to nine months.

Given this backdrop, and assuming slow growth in short-term credit offtake due to economic uncertainties, two things are likely:

- We are heading for a lower interest rate regime, never mind what the Reserve Bank of India (RBI) cut in its monetary policy.

- And second, loan rates – especially in the low-default categories like retail home, auto and personal loans – may see some of the sharpest falls.

The latest numbers tell the story well. As on 9 December, a full month after demonetisation, bank deposits soared by 15.9 per cent year-on-year, while bank credit grew only 5.8 per cent.

The wide gap between deposit growth and lending stagnation suggests that banks have no option but to launch the mother of all short-term rate cuts in 2017.

Your call to action:

If you are a middle class saver, lock into the highest fixed deposit rates now, especially for one- and two-year tenures. Longer-term deposits may be avoided for now. The real position on deposit and lending rates will be known only after five or six months, once the demonetisation effect wears out. Also try moving some of your savings to company deposits. Some solid ones are offering 8.5-9 per cent rates.

If you are a borrower, wait for a few days. The chances are banks will be forced to cut retail and working capital rates to grow their loan-book again.

If you are an investor, move money away from fixed-rate avenues to stocks. It is difficult to see stocks staying in the dumps when rates are crashing.