After posting double-digit growth in FY25, banks are bracing for a slowdown in term deposit growth in the current financial year, as they begin reducing deposit rates. Lower rates make mobilizing deposits difficult for banks.
The Reserve Bank of India (RBI) has cut the repo rate by 50 basis points—25 bps each in the February and April monetary policy reviews — but these cuts have not been fully passed on to depositors. With monthly inflation staying below 4% for three consecutive months since February, most analysts now anticipate two more repo rate cuts in the current calendar year.
Canara Bank MD and CEO K Satyanarayana Raju told TNIE that while the bank had to pass on the benefits of policy rate cuts quickly to nearly 44% of its loan book, it faces a lag in reducing interest rates on existing term deposits due to contractual obligations. Although banks have started lowering rates on new deposits, existing ones will continue to earn interest at older, higher rates until renewal.
With two repo rate cuts already delivered and more expected, deposit rates are likely to fall by 50–100 basis points. The weighted average rate of existing term deposits currently stands at 7.04%, which is 15 bps higher than a year ago. According to bankers, retail deposit rates are expected to begin softening from the second quarter of FY26.
“The softening of deposit rates, particularly in the bulk segment, is already visible, and a similar trend in retail deposits is expected from August onwards,” said Raju.
Deposit growth has remained in healthy double digits for the past three financial years, but that seems unlikely this year. Anticipating a slowdown, some banks have launched special deposit schemes to attract funds at prevailing rates.
Punjab National Bank (PNB), after discontinuing its 400-day, 7.25% scheme in April, introduced a 390-day scheme at 7.10%, under which it mobilized ₹8,000 crore in May. “Despite the lower rates, customers prefer parking funds in banks amid market and geopolitical volatility,” PNB MD and CEO Ashok Chandra told TNIE.
Union Bank of India also recently rolled out an innovative term deposit scheme offering 6.75% interest, along with facilities for premature closure and loans against the deposit.
As interest rates peaked in FY25, term deposits grew by around 11%, while CASA (current and savings account) deposits rose by only 6%. CASA deposits, a cheaper source of funds for banks, declined in share last year, with many banks reporting CASA ratios of under 40%. This decline contributed to a contraction in net interest margins during the financial year.