Catch-22 for banks as interest rates dip

Banks must cut deposit rates; but that may put off depositors

- Shayan Ghosh & Anshika Kayastha

Lenders will have to fight harder for deposits as savings rates plunge to a 25-year low and term deposit rates see sharp cuts, raising the spectre of a liquidity squeeze if and when credit demand picks up. Even as a 100 basis point reduction in the repo rate has forced lenders to reduce deposit rates, banks hope that savers would continue to park idle funds with them given the broader economic uncertainties.

The Reserve Bank of India's (RBI) rate cuts have automatically brought down loan rates on 60% of floating rate loans, which are linked to external benchmarks like the repo. However, since term deposit rates can be lowered only at the time of opening or renewing a deposit, banks are forced to slash savings rates more to maintain margins.