MUMBAI: State Bank of India (SBI) on Monday cut interest rates sharply for short term and bulk deposits, and marginally for retail long-term deposits. While the bank cited surplus liquidity and falling interest rate scenario as reasons for the cut, other state-run banks are expected to follow suit as they benchmark their rates to SBI’s.
Interest rates have been cut by 50-75 basis points (bps) for deposits with tenure between 7 and 179 days. Retail long-term deposit rates will come down by 20 bps, while interest rate for bulk deposits of Rs 2 crore and above will see a 35 bps cut. The new rates will be effective from August 1. Bankers said the cut was being effected so that lower rates signalled by RBI in three policy rate cuts earlier could be passed on.
There is usually a time lag between policy rate announcement and actual cuts in lending rates, but bankers are now under pressure to do so as RBI is expected to slash its repo rate once again in August. While it is good news for borrowers — a reduction in deposit rates will allow banks to cut lending rates — it means lower returns for those keeping money in bank deposits. Interest rates on one-year deposits with SBI will come down from 7% to 6.8%, and from 6.7% to 6.6% for deposits of three to five-year tenure.
However, interest on deposits maturing between 5 and 10 years, rates will drop by 10 bps to 6.5%.
In comparison to SBI’s rates, saving schemes like PPF and NSC are currently offering a return of 7.9%, while Kisan Vikas Patra is giving 7.6% with a lock-in period of 113 months. This could trigger problems for banks as savings may flow into these instruments. Even before SBI announced the cuts, Bank of Baroda had slashed deposits rates by 25 BPS, and its one-year as well as 5-10-year deposit rates now stand at 6.45%.
Where to park your money for higher returns
Senior citizens will be among the most affected from the cut on FDs. Experts say they can look for other options like the Senior Citizens Savings Scheme and LIC’s Pradhan Mantri Vaya Vandana Yojana that offer over 8% returns.