Banks May Cut Interest Rates Again

 

Why Your Savings Account Might Earn Less Soon

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Indian banks may cut deposit interest rates by 25–50 bps to manage surplus liquidity and protect margins amid RBI’s recent repo rate action.

If you're someone who parks money in a savings account, here’s something you should pay attention to. Banks across India are likely to cut savings and term deposit rates again—and this time, the reason has a lot to do with too much money chasing too few returns.

Let’s break down what’s going on, why this matters to your money, and what economic forces are in play.

What’s Triggering These Rate Cuts?

It starts with the RBI’s recent decision to cut the repo rate by 50 basis points (bps). The repo rate is the interest rate at which commercial banks borrow money from the central bank. When the RBI cuts this rate, borrowing becomes cheaper. The goal? To stimulate economic activity.

But when banks can borrow at cheaper rates, they don’t need to attract as much money from the public through savings and deposits. So they start offering lower interest rates on these products. It’s economics 101—supply of funds has gone up, so the price of borrowing (or the interest rate you earn) comes down.

Here’s a quick analogy:

Imagine you’re running a water tank supply business. Suddenly, it rains non-stop for a month. With everyone’s tanks already full, you’ll likely reduce your rates—or risk not getting any customers at all. Banks are in a similar spot with money right now.

Surplus Liquidity: Too Much Cash in the System

The real driver here is surplus liquidity—banks are flush with funds. Why? Several factors:

• RBI has pumped money into the economy via repo cuts and open market operations (OMOs).

• Cash Reserve Ratio (CRR) has been reduced in stages to free up funds for lending.

• Demand for credit is recovering but still lags behind deposit inflows.

A key concept from macroeconomics explains this: in a liquidity trap, even when central banks push more money into the system, it doesn’t always result in higher lending or economic activity. People either hold on to their money or banks don’t find enough viable lending opportunities.

So, to protect their net interest margins (NIMs)—the difference between what banks earn from loans and pay on deposits—banks will likely lower deposit rates again.

How Much Could Rates Fall?

The savings account rates could drop by another 25–50 basis points (0.25–0.50%). This is after an average decline of 27 bps since February.

This may not sound like a lot, but for those relying on fixed income—like retirees or conservative investors—it makes a real difference.

For instance, if you had ₹10 lakh in a fixed deposit earning 6% annually, a 50 bps cut drops your return to 5.5%, reducing your annual earnings by ₹5,000.

What Does This Mean for You?

Here’s what young professionals and business owners should consider:

• Reevaluate where you park your idle money. Traditional savings may no longer offer meaningful returns.

• Look for smarter parking options like liquid mutual funds or short-term debt funds, which may still offer better yields.

• Businesses relying on deposits for working capital should plan for lower interest income.

On the flip side, borrowers stand to benefit. As the transmission of the repo cut improves, you might get better loan rates—especially in sectors like MSMEs and housing.

Faster Transmission Is Finally Happening

Historically, the transmission of RBI rate cuts into actual lending and deposit rates has been slow. But things are changing. According to RBI Governor Sanjay Malhotra, the transmission of repo rate cuts is now faster than in previous economic cycles.

This is especially evident in the short-term debt market. For example:

• Bank bond yields have fallen by over 50 bps.

• Standing loan rates have dropped by up to 17 bps.

• New deposits are now being repriced within months, not years.

Final Thoughts

The next time you notice your bank updating its interest rate, know that it's not just an arbitrary change. It’s the result of a complex interplay of liquidity, inflation expectations, monetary policy, and economic signals.

We’re in a cycle where the economy is being nudged toward growth through lower interest rates. While this supports borrowing and investment, savers will need to adapt.

In economic terms, this is a classic example of how monetary policy tools like repo rates impact the broader economy through the transmission mechanism. It's the chain reaction that begins with the central bank—and ends in your savings account.

Stay alert, diversify your investments, and don’t let your money sit idle when it could be working harder elsewhere.