Banks cut FD rates
- June 5, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Banks cut FD rates
Section: Monetary Policy
- Rate cuts (5-20 bps) on fixed deposits of upto3 year tenure by the larger banks.
- Smaller banks have smaller deposit base are continuing to increase rates
- Liquidity of the system was increased by government spending and currency intervention of RBI (Rs. 2000 Note withdrawal)
- the weighted average domestic term deposit rate (WADTDR) has reached 6.36 % in April and will reduce further
What it indicates:
- High liquidity in the banking system
- Easing of rates by RBI in view of inflation being in control.
- CPI inflation for April came below RBI’s upper threshold of 6%
- Deposit mobilization (liabilities) is adequate with respect to the credit creation (loans being made)
- The decision to cut rates for 3-year deposit also reflects that the bulk of recent credit growth has been in form of retail loans and working capital credit (having similar tenure)
Why FD Rates are important:
- The rates are a indicator of monetary policy transmission
- A comparison between the WALR (weighted average lending rate) and WADTDR gives an idea of to what extent rate cuts got transmitted
- From Jan-Nov 2022, the RBI hiked the repo rate by 1.90%, whereas the weighted FD rate has been hiked by only 0.59%. This shows that only 31% of the 1.90% has been transmitted to the FD investor.
- But the WALR is generally seen to increase in sync with the repo rate.
- Economic Survey 2023 in its analysis of transmission of monetary policy across bank groups during FY23 (up to November 2022) indicates following:
- that the increase in the WALRs on fresh loans was higher in the case of public sector banks (PSB take the lead in increasing loan rates)
- the WADTDR on outstanding deposits and WALR on outstanding loans was higher for private banks. (Private banks make costly loans and also offer higher deposit rates0