Fixed deposits may lose edge as RBI looks to whittle down rates A likely CRR cut this month will hand more funds to lenders, which can afford to lower their deposit rates

Fixed deposits may lose edge as RBI looks to whittle down rates

A likely CRR cut this month will hand more funds to lenders, which can afford to lower their deposit rates



Fixed deposits (FDs) never looked so alluring, especially given the uncertainties in the current economic landscape.
But the sting in the tale is it may be a different scenario post January 24, when the Reserve Bank of India reviews its monetary policy. And chances are that the apex bank may go in for a cut in the cash reserve ratio (CRR), which is the amount of funds that lenders need to keep with the central bank. A reduction in it means banks have to park less money with the RBI. This, experts say, will leave banks with more elbowroom to deploy funds and, more importantly, can afford to cut deposit rates.
“If CRR is reduced, then there will be an immediate impact on money market rates. Money market rates will fall, with a lag getting transmitted to bank fixed deposit rates. If CRR is cut by 50 basis points, then deposit rates may fall by 25 basis points,” said Mohan Shenoi, head of treasury, Kotak Mahindra Bank.
Analysts believe it’s the rates of fixed deposits with a tenure of up to two years that will see an instant decline. “Bank FD rates may not initially fall by more than 50 basis points. So, we can expect that by March, it may fall by 25-50 basis points in tenures of up to 2 years,” said Vaibhav Agrawal, vice-president (research), Angel Broking.
But the fall in rates will not be as quick for longer tenure deposits, said Parthasarathi Mukherjee, president (treasury and international banking), Axis Bank. His prescription is clear: Before the expected CRR cut in January, this may be the last chance for customers to lock in funds in bank FDs.
Last year, high deposit rates have been a handy tool for banks to woo customers. Even some FD products offer rates above 9% on a 1-year deposit.
“A 1-year bank FD fetches about 9.25%. The post-tax returns are in the range of 7.1-8.3%, depending on the tax slab of the customer. It is not just bank FD, the returns of a few other investment instruments may also start falling with the fall in interest rates,” said Suresh Sadgopan, who runs Ladder 7, a financial advisory firm.
During the fortnight ended December 16, bank deposits grew 18% year on year to Rs.56,72,592.36 crore.