Banks cut FD rates

Subject :Economy

Section: Monetary Policy

Key points:

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